Norbord Reports 2008 Year-end Results



    
    Note: Financial references in US dollars unless otherwise indicated

    HIGHLIGHTS

    -   Completed recapitalization initiatives, including CAD $240 million
        Rights Offering
    -   Reached an agreement with lenders to amend revolving bank lines to
        widen financial covenants and extend term to 2011
    -   Reduced investment in operating working capital by $76 million
        year-over-year
    -   Completed US MACT environmental compliance projects
    -   Improved safety recordable rate 15%
    -   Generated margin improvements of $14 million
    

    TORONTO, Jan. 30, 2009 /CNW/ - Norbord Inc. (TSX:NBD.WT) today reported a
2008 loss of $116 million or $0.77 per share compared to a loss of $45 million
or $0.31 per share in 2007. The Company recorded a loss of $30 million in the
fourth quarter of 2008 or $0.19 per share compared to a loss of $13 million or
$0.09 per share in the fourth quarter last year.
    For the full year, Norbord generated negative EBITDA of $60 million
compared to positive EBITDA of $42 million in the prior year. Higher input
prices, especially resin and energy, accounted for $81 million of the
year-over-year decline. In the fourth quarter, Norbord recorded EBITDA of
negative $28 million versus negative $9 million in the fourth quarter of 2007.
The quarter-over-quarter change in EBITDA was due to the impact of lower
production volumes and higher input costs.
    "The past year has been the most difficult in Norbord's history," said
Barrie Shineton, President and CEO. "The issues have been well documented:
poor demand for our core products; high input costs; and a breakdown in the
financial markets resulted in a lack of available credit for both individuals
and corporations.
    We took a number of difficult decisions during the fourth quarter to
improve liquidity and strengthen our balance sheet. We raised CAD $240 million
through our Rights Offering, suspended the quarterly dividend and negotiated
bank line amendments with our lenders. We also reduced production to limit our
exposure to housing-related OSB and lowered our investment in operating
working capital. We have taken more costs out of our already lean overhead by
eliminating bonuses, reducing headcount and cutting consulting and travel
expenses. We believe we're well positioned for another difficult year in 2009
as a result of these actions."

    Recapitalization Initiatives

    Norbord raised CAD $240 million under its previously announced Rights
Offering ("Offering") to shareholders. A total of approximately 432 million
common shares and 136 million warrants of Norbord are now issued and
outstanding.
    During the fourth quarter, approximately 110 million units comprising
approximately 110 million common shares and approximately 55 million warrants
were issued to shareholders that elected to exercise rights under the
Offering, including exercise of the basic subscription right by Brookfield
Asset Management Inc. (TSX and NYSE:  BAM, Euronext:BAMA) or its affiliates
(collectively, "Brookfield"), Norbord Inc.'s largest shareholder. Gross
proceeds from the initial subscriptions totaled approximately CAD $96 million.
    On January 6, 2009, the Standby Purchase Agreement between Norbord and
Brookfield was settled. Brookfield purchased approximately 163 million
additional common shares and approximately 81 million warrants for gross
proceeds of approximately CAD $144 million. Brookfield now holds approximately
325 million common shares or approximately 75% of the total number of
Norbord's common shares issued and outstanding and approximately 131 million
warrants.
    In response to the unprecedented financial market turmoil and uncertainty
regarding the near-term recovery of US housing starts, the Board of Directors
suspended the CAD $0.10 per share quarterly dividend during the fourth
quarter. The CAD $0.10 dividend paid on December 21, 2008 to shareholders of
record on December 1, 2008 was the last payment to be made until further
notice.
    In November 2008, the Company reached agreement to amend the terms of its
revolving bank lines with six of its seven lenders. The amendments are subject
to customary conditions, including completion of definitive documentation
which Norbord expects to complete during the first quarter of 2009. At that
time, Norbord's aggregate revolving bank line commitment will be reduced from
$235 million to $205 million, the term will be extended to May 2011 and the
financial covenants will be amended to the following: minimum tangible net
worth of $250 million and maximum net debt to total capitalization, book basis
of 70%. In addition, a $50 million term debt facility with Brookfield will
remain available to the Company.
    At year end, Norbord's net debt was 32% of capitalization on a market
basis and 61% on a book basis. Upon completion of these recapitalization
initiatives, Norbord will have access to approximately $300 million of
liquidity, tangible net worth of $384 million and net debt to capitalization
of 51% (book basis) on a pro forma basis.

    Market Conditions

    US housing starts in 2008 were approximately 0.9 million, down from 1.35
million in 2007 and 1.8 million in 2006.
    For the full year, North Central OSB prices averaged $172 per Msf
(7/16-inch basis) compared to $161 per Msf in 2007. In the South East region,
where 55% of Norbord's North American capacity is located, OSB prices averaged
$143 per Msf in both 2008 and 2007.
    The North Central OSB benchmark price averaged $170 in the fourth quarter
of 2008, down $31 from the third quarter. South East benchmark prices averaged
$137 in the fourth quarter of 2008, down $21 from the prior quarter. Lower OSB
prices during the quarter were due to the combination of the seasonal slowdown
in order files and an extremely cautious customer buying pattern as credit and
working capital concerns spread.
    The economic downturn that began in the US has expanded globally.
Consumer confidence and housing-related spending dropped sharply across Europe
as a result. In the UK, where the majority of Norbord's European assets are
located, housing starts fell 35% and housing prices declined 16% in 2008. Both
indicators are expected to weaken further in 2009. As a result, European OSB
prices declined 15% versus 2007 and UK particleboard prices were down 3% and
MDF prices were unchanged. Year-over-year, average annual particleboard and
MDF prices remained relatively unchanged, however, prices did trend sharply
down in the second half of 2008.

    Performance

    Norbord's North American OSB mills operated at approximately 60% of
capacity in the fourth quarter versus 90% of capacity in the third quarter of
2008. For the full year, Norbord's North American mills operated at
approximately 80% of capacity. Industry-wide, OSB mills in North America
operated at approximately 55% of capacity in the fourth quarter and 70% of
capacity for the full year.
    Norbord curtailed 30% of its European capacity in the fourth quarter and
15% for the full year 2008.
    Subsequent to year end, Norbord announced that indefinite curtailments
would be taken at its OSB mills in Huguley, Alabama and Jefferson, Texas to
contain costs and manage operating working capital. Combined, these mills
represent 915 MMsf (3/8-inch basis) of annual production capacity.
Approximately 215 people have been impacted as a result of these decisions.
    Norbord will continue its practice of monitoring the financial
performance of each mill and will suspend operations on a temporary or
indefinite basis should cash losses exceed shutdown thresholds. As Norbord
does not consider temporary or indefinite curtailments material in the current
market environment, these shutdowns will be summarized at the end of each
quarter rather than disclosed as they happen.
    Norbord's North American per unit OSB production costs increased 7% in
the fourth quarter versus the third quarter of 2008 due primarily to the
impact of production curtailments and energy usages. For the full year, per
unit OSB production costs increased 9% over 2007 due to increased key input
prices in addition to the negative impact of lower production volumes.
    Capital investments totalled $27 million in 2008; $5 million in the
fourth quarter. These capital investments included approximately $12 million
to complete the last of Norbord's US MACT air emissions compliance projects.
Norbord expects to limit 2009 capital investments to less than $25 million.

    Developments

    Norbord Inc. and Kruger Inc. have reached an agreement in principle to
form a joint venture to combine their respective Hardwood Plywood Operations.
The transaction is subject to necessary approvals and is expected to close in
the first quarter of 2009. The new company, True North Hardwood Plywood Inc.,
will operate out of Norbord's mill in Cochrane, Ontario.

    Conference Call

    Norbord will hold a conference call for analysts and institutional
investors on Friday, January 30, 2009 at 11:00 a.m. ET. The call will be
broadcast live over the Internet via www.norbord.com and www.newswire.ca. A
replay number will be available approximately one hour after completion of the
call and accessible until March 1, 2009, by dialing 647-436-0148 or
888-203-1112. The passcode is 1674650. Audio playback and a written transcript
will be available on the Norbord website.

    Norbord Profile

    Norbord Inc. is an international producer of wood-based panels with
assets of $1.0 billion, employing approximately 2,500 people at 15 plant
locations in the United States, Europe and Canada. Norbord is one of the
world's largest producers of oriented strand board (OSB). In addition to OSB,
Norbord manufactures particleboard, medium density fibreboard (MDF), hardwood
plywood and related value-added products. Norbord is a publicly traded company
listed on the Toronto Stock Exchange under the symbols NBD and NBD.WT.

    This news release and attached Shareholders Letter contain
forward-looking statements, as defined in applicable legislation. Often, but
not always, words such as "believe," "will," "expect," "expects," "expected,"
"forecast," "estimate", "estimates," "estimated," "likely," "may," "agreed
to," "would," and other expressions which are predictions of or indicate
future events, trends or prospects and which do not relate to historical
matters identify forward-looking statements. Forward-looking statements
involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of Norbord to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements.
    Although Norbord believes it has a reasonable basis for making these
forward-looking statements, readers are cautioned not to place undue reliance
on such forward-looking information. By its nature, forward-looking
information involves numerous assumptions, inherent risks and uncertainties,
both general and specific, which contribute to the possibility that the
predictions, forecasts and other forward-looking statements will not occur.
Factors that could cause actual results to differ materially from those
contemplated or implied by forward-looking statements include: general
economic conditions; risks inherent with product concentration; effects of
competition and product pricing pressures; risks inherent with customer
dependence; effects of variations in the price and availability of
manufacturing inputs; risks inherent with a capital intensive industry; and
other risks and factors described from time to time in filings with Canadian
securities regulatory authorities.
    Except as required by applicable laws, Norbord does not undertake to
update any forward-looking statements, whether as a result of new information,
future events or otherwise, or to publicly update or revise the above list of
factors affecting this information. See the "Caution Regarding Forward-Looking
Information" statement in the March 1, 2008 Annual Information Form and the
cautionary statement contained in the "Forward-Looking Statements" section of
the 2008 Management's Discussion and Analysis dated January 29, 2009.


    January 30, 2009

    To Our Shareholders,

    The past year has been the most difficult in Norbord's history.
    Our negative earnings of $116 million in 2008 reflected ongoing weakness
in US housing starts, a collapse in UK housing activity and the overall
economic impact of the breakdown in global financial markets. Our results were
also affected by a $140/barrel peak oil price that resulted in a significant
increase in our manufacturing input costs, especially those associated with
energy and resin.
    The economic drivers behind the prolonged US housing downturn have been
well documented by both mainstream and financial media. The Market and Outlook
sections of our annual Management's Discussion and Analysis contain a more
comprehensive review of current market conditions and the adjustments we
believe are required for meaningful improvements in US and UK housing and I
encourage you to read this material.
    Throughout 2007 and early 2008, we took proactive measures to strengthen
our balance sheet and secure enough liquidity to manage through what we then
believed would be a typical housing downturn. During that time, we completed
the early refinance of $200 million in long-term debt, added $135 million in
bank lines and concluded an $85 million accounts receivable securitization
program. It was our view that these actions would provide adequate liquidity
to get us through the downturn.

    Cyclical US Housing Downturn Expands into Global Financial Crisis

    The world changed in September 2008 when the US credit crisis expanded
into a global financial meltdown. The challenges facing our European
operations mirrored those in North America and it became clear that a housing
recovery in North America and the UK would be delayed. It was also apparent
that traditional financing options were no longer available.
    Norbord acted quickly to stabilize its balance sheet and prepare for a
"worst case" scenario. In November, we announced a plan to recapitalize the
business. We made the difficult decision to suspend our quarterly dividend. We
also raised CAD $240 million through a Rights Offering supported by Brookfield
Asset Management Inc. - our principal shareholder. And, we negotiated bank
line amendments to widen financial covenants and extend terms until 2011,
which we expect will take effect by the end of the first quarter.
    Our operations also took decisive action to reduce costs and further
improve our competitive position. Specifically, we:

    
    -   Reduced production by approximately 20% in both North America and
        Europe in 2008 to conserve cash and manage our operating working
        capital risk. I'm pleased to report that our efforts in this area
        resulted in a $76 million reduction in operating working capital.

    -   Lowered our already lean overhead costs by eliminating bonus
        payments, reducing headcount and cutting most consulting and travel
        expenses.

    The success of these financial and operational initiatives allows us to
head into the first quarter with our house in order and positions us well to
manage through another difficult year in 2009.

    Strategy Remains Unchanged

    We continue to believe that oriented strand board (OSB) is the industry's
best long-term growth opportunity. We also believe that the effective
execution of our strategy will provide real value for our shareholders over
the cycle. As we look to 2009 and 2010, we will continue to stay the course as
we:

    Develop a world class safety culture - Our 2008 OSHA rate of 2.00 was a
    best ever result and we will work to achieve further gains in 2009.

    Pursue growth in OSB - We will prudently undertake a limited number of
    high-return projects to increase productivity at existing mills so we are
    in optimal operating condition when markets improve. We will also
    continue to evaluate acquisition opportunities if, and when, they arise.

    Own high-quality assets with low cost positions - We will use
    curtailments during the year to complete maintenance projects, conserve
    cash and manage operating working capital.

    Maintain a margin-focused operating culture - Reduced operating rates
    limit the visibility of our margin improvement efforts. However, we will
    continue to progress the margin improvement gains realized over the past
    five years.

    Focus on growth customers - We will continue our work to minimize
    exposure to housing-related OSB and grow our sales with big box retailers
    and industrial customers.

    Allocate capital with discipline - Our 2009 capital program will be
    limited to $25 million, appropriately reflecting market conditions.
    


    Looking Ahead

    We don't expect any recovery in the housing markets in North America or
Europe during 2009.
    We agree with the industry experts' opinion that the decline in US
housing was an early indicator of the current global financial crisis and that
the stabilization of US housing will be the main driver of an eventual
recovery. However, in our view, several market adjustments must occur before
there is a meaningful improvement, including:

    
    -   Government stimulus packages must filter through to the housing
        sector,
    -   Falling house prices need to stabilize before buyers will re-enter
        the market,
    -   Mortgage lenders must support the return of qualified and first-time
        buyers to the housing market, and
    -   The high inventory of new and existing homes for sale must return to
        normal levels.
    

    We continue to believe that the underlying demographics will support
strong demand for new homes. We expect to see signs of a US housing recovery
in 2010 or early 2011, with recovery in the UK pacing slightly behind.
    Norbord has the right plan in place to manage through the remainder of
the downturn. Our recent recapitalization initiatives have significantly
improved our ability to access liquidity. We are comfortable with our cost
position in North America and the depreciation of the Pound Sterling further
improves our competitive position in Europe. And, we have the continued
support of our major shareholder. We are well positioned for success when the
markets do recover.
    On behalf of everyone at Norbord, I thank you for your continued support
during this challenging point in our history. I look forward to updating you
on our progress throughout the year.

    
    (signed)
    J. Barrie Shineton
    

    This letter includes forward-looking statements, as defined by applicable
securities legislation. Often, but not always, forward-looking statements can
be identified by the use of words such as "would," "expect," "positions,"
"when," "if," "must," "believe," "view," "when," or variations of such words
and phrases or statements that certain actions "may," "could," "must,"
"would," "might," or "will" be undertaken, occur or be achieved.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements
of Norbord to be materially different from any future results, performance or
achievement expressed or implied by the forward-looking statements. See the
cautionary language in the Forward-Looking Statements section of the
Management's Discussion and Analysis.

    JANUARY 29, 2009

    Management's Discussion and Analysis

    INTRODUCTION

    This Management's Discussion and Analysis (MD&A) provides a review of the
significant developments that impacted Norbord's performance during 2008
relative to 2007. The information in this section should be read in
conjunction with the audited financial statements, which follow this MD&A.
    In this MD&A, "Norbord" means Norbord Inc. and all of its consolidated
subsidiaries and affiliates, and "Company" means Norbord Inc. as a separate
corporation, unless the context implies otherwise. "Brookfield" means
Brookfield Asset Management Inc. or any of its consolidated subsidiaries and
affiliates, a related party, by virtue of a controlling equity interest in the
Company.
    In 2007, Norbord ceased voluntarily filing certain reports with the US
Securities and Exchange Commission. Additional information on Norbord,
including documents publicly filed by the Company, is available on the
Company's web site at www.norbord.com or the System for Electronic Document
Analysis and Retrieval (SEDAR) at www.sedar.com.
    Some of the statements included or incorporated by reference in this MD&A
constitute forward-looking statements within the meaning of applicable
securities legislation. Forward-looking statements are based on various
assumptions and are subject to various risks. See the cautionary statement
contained in the forward-looking statements section.
    To enhance shareholders' understanding, certain five-year historical
financial and statistical information is presented. Norbord's significant
accounting policies and other financial disclosures are contained in the
audited financial statements and accompanying notes, which follow this MD&A.
All financial references in the MD&A are stated in US dollars unless otherwise
noted.
    Certain historical financial and statistical information for the years
2004 and 2003 include information for the paper and timberlands business
(Fraser Papers Inc.), which was distributed to Norbord's common shareholders
on June 30, 2004, and thus may not be comparable with the information for the
years 2008, 2007, 2006 and 2005.
    EBITDA, EBITDA margin, operating working capital, total working capital,
capital employed, ROCE, ROE, net debt, net debt to capitalization, book basis,
and net debt to capitalization, market basis are non-GAAP financial measures
described in the Non-GAAP Financial Measures section. Non-GAAP financial
measures do not have any standardized meaning prescribed by Canadian Generally
Accepted Accounting Principles (GAAP) and are therefore unlikely to be
comparable to similar measures presented by other companies. Where
appropriate, a quantitative reconciliation of the non-GAAP financial measure
to the most directly comparable GAAP measure is also provided.

    BUSINESS OVERVIEW

    Norbord is an international producer of wood-based panels with 15 plant
locations in the United States, Europe and Canada.
    Norbord is one of the world's largest producers of oriented strand board
(OSB) with annual capacity of 5 billion square feet (Bsf) (3/8-inch basis).
The core assets of Norbord's OSB business are located in the South East region
of the United States. The Company is also a significant producer of wood-based
panels in Europe. Norbord does not own any timberlands. It purchases wood
fibre from third parties that include private landowners and government-owned
and -managed timberlands. Norbord employed approximately 2,500 people at
December 31, 2008.
    Operations include 11 OSB mills, 2 particleboard mills, 2 medium density
fibreboard (MDF) mills, 1 hardwood plywood mill and a furniture plant. The
Company reports all operations as a single operating segment.

    STRATEGY

    Norbord's business strategy is focused entirely on the wood panels sector
- in particular OSB - in North America and Europe. The table below summarizes
the six key components of our strategy and our performance in each strategic
area during 2008. The Company is of the view that successful execution of this
strategy will provide real value for our shareholders over the cycle.

    
    -------------------------------------------------------------------------
    Strategic Priority         2008 Performance
    -------------------------------------------------------------------------
    1.  Develop world class    -  Improved Occupational Safety and Health
        safety culture.           Administration (OSHA) recordable rate by
                                  15% to 2.00.
                               -  Completed Safety Leadership Training for
                                  all operational management and supervisors.
                               -  Increased the number of employees directly
                                  involved in safety activities by 25% to a
                                  total participation rate of 76%.
    -------------------------------------------------------------------------
    2.  Pursue growth in OSB.  -  Rebuilt OSB press at Guntown, Mississippi.
                               -  Completed significant maintenance on OSB
                                  press at Joanna, South Carolina.
    -------------------------------------------------------------------------
    3.  Own high-quality       -  Conserved cash and managed operating
        assets with               working capital by curtailing 20% of North
        low-cost positions.       American panel capacity and 15% of European
                                  panel capacity.
    -------------------------------------------------------------------------
    4.  Maintain a             -  Generated margin improvements of
        margin-focused            $144 million over the past five years;
        operating culture.        $14 million in 2008.
    -------------------------------------------------------------------------
    5.  Focus on growth        -  Limited exposure to housing-related OSB by
        customers.                increasing sales volume to strategic big
                                  box retailers and industrial customers.
                               -  Increased sales volume to top 10 customers.
    -------------------------------------------------------------------------
    6.  Allocate capital       -  Constrained capital program to $27 million.
        with discipline.       -  Directed approximately 45% of 2008 capital
                                  program to US Environmental Protection
                                  Agency's Maximum Achievable Control
                                  Technology (MACT) compliance projects.
    -------------------------------------------------------------------------

    In addition to the highlights listed above, Norbord also accomplished the
following in 2008:

    -   Executed recapitalization initiatives, including a $200 million
        Rights Offering (CAD $240 million)
    -   Reached agreement with lenders to amend revolving bank lines - extend
        term to 2011 and widen financial covenants, subject to conditions,
        including completion of definitive documentation
    -   Reduced investment in operating working capital by $76 million year
        over year
    -   Increased accounts receivable securitization facility by $35 million
    -   Completed final US Environmental Protection Agency's Maximum
        Achievable Control Technology (MACT) compliance projects before the
        October 2008 deadline.
    

    Protecting the balance sheet is an important element of Norbord's
financial strategy. Management believes that its record of superior
operational performance and prudent balance sheet management should enable it
to access public and private capital markets subject to financial market
conditions. At the end of the year, the Company had unutilized liquidity of
$259 million, net debt to capitalization, book basis of 61%, and tangible net
worth of $301 million. On a pro forma basis, Norbord will have access to
approximately $300 million of liquidity, net debt to capitalization, book
basis of 51% and tangible net worth of $384 million upon completion of the
recapitalization initiatives subsequent to year-end.


    
    Summary

    (US $ millions, except
     per share information,
     unless otherwise noted)        2008     2007     2006     2005     2004
    -------------------------------------------------------------------------

    Return on capital
     employed (ROCE)                (6)%       4%      25%      53%      73%
    Return on equity (ROE)         (37)%    (11)%      20%      46%      47%
    Cash provided by (used
     for) operating activities       (13)      15      191      314      562
    Cash provided by (used
     for) operating
     activities per share         $(0.09)   $0.10    $1.33    $2.14    $3.75
    -------------------------------------------------------------------------

    Net sales                        943    1,104    1,252    1,462    1,486
    EBITDA                           (60)      42      247      495      631
    Earnings from continuing
     operations                     (116)     (45)      97      248      332
    Earnings                        (116)     (45)      97      248      326

    Earnings from continuing
     operations per share
     (diluted)                     (0.77)   (0.31)    0.67     1.61     2.19
    Earnings per share (diluted)   (0.77)   (0.31)    0.67     1.61     2.14
    Common dividends per share      0.38     0.38     1.25     1.13     1.10
    -------------------------------------------------------------------------

    Total assets                   1,041    1,404    1,299    1,328    1,391
    Long-term debt                   542      480      480      440      450
    Net debt                         477      547      460      285      236
    Net debt to capitalization,
     market basis                    32%      30%      27%      17%      13%
    Net debt to capitalization,
     book basis                      61%      60%      51%      35%      30%
    -------------------------------------------------------------------------

    Shipments (MMsf-3/8")
    OSB                            4,088    4,463    4,289    4,136    3,731
    Particleboard(1)                 398      631      643      583      438
    MDF                              435      494      525      545      593
    Hardwood plywood                  51       71       78       77       79

    Indicative OSB pricing
    Average OSB price - North
     Central ($/Msf 7/16")           172      161      217      320      369
    Average OSB price -
     South East ($/Msf 7/16")        143      143      219      338      370
    Average OSB price -
     Europe (euro/m3)                203      240      208      199      222
    -------------------------------------------------------------------------
    (1) Excludes particleboard consumed internally (114 MMsf, 138 MMsf,
        178 MMsf, 183 MMsf, 209 MMsf for each period respectively).
    


    Norbord was challenged by unprecedented economic and financial market
turmoil which began in North America and then evolved into a global economic
crisis during 2008. Norbord's fundamental strategy of geographic
diversification was less evident in its 2008 results as markets for Norbord's
North American and European products started to move in the same direction in
response to the global economic contraction. European markets which were
exceptionally robust in 2007, began a sharp decline in the second half of
2008. The Company's ability to minimize losses, conserve cash and
strategically manage operating working capital continues to be instrumental in
ensuring that Norbord is well positioned for another difficult year in 2009.
    North American OSB prices remained at cyclical lows throughout the year
reflecting the continued decline in US housing starts. Fluctuation in North
American OSB price and demand is the most significant variable affecting
Norbord's results. North American benchmark prices averaged $172 per thousand
square feet (Msf) (North Central 7/16-inch basis) in 2008, well below the
historical five-year average of $248 per Msf. Rising global commodity prices
had a significant negative impact on the industry for most of 2008. Norbord
successfully managed production curtailments in both North America and Europe
in response to the declining market conditions and reduced demand. Demand and
pricing for North American OSB are expected to remain weak in the near term
with some improvement expected in 2010. Long term, the underlying demographics
continue to support demand for new homes. Further, management believes
Norbord's North American and European operations provide meaningful market and
geographic diversification over the cycle, while capitalizing on Norbord's
strength as a panel producer.
    Throughout the cycle, Norbord took steps to prepare itself for a housing
market downturn by containing costs and focusing its sales mix on
higher-margin products. The Margin Improvement Program (MIP) has helped
Norbord to improve its competitive position, generating over $144 million of
savings in the past five years. MIP measures margin improvement relative to
the previous year at constant prices and exchange rates. These gains have
helped offset the impact of industry-wide rising input costs and management
believes its relative competitive position has improved over time.
    EBITDA in 2008 was negative $60 million versus positive $42 million in
2007. EBITDA margins for 2008 were negative 6%, compared to positive 4% for
the prior year. A loss of $116 million or $0.77 per share was generated in
2008 versus a loss of $45 million or $0.31 per share in 2007. Pre-tax ROCE
averaged negative 6% for 2008 compared to positive 4% in 2007. ROCE is a
measurement of financial performance, focusing on cash generation and the
efficient use of capital. As Norbord operates in a cyclical commodity
business, Norbord interprets ROCE over the cycle as a useful means of
comparing businesses in terms of efficiency of management and viability of
products. Over the past five years, Norbord has achieved an average annual
ROCE of 30%.
    Norbord's North American OSB operations achieved break-even EBITDA
results in the second and third quarters, which is a positive and notable
achievement in light of the weak housing markets and continued pressure from
rising global energy and resin prices. Norbord's European operations generated
positive EBITDA of $4 million in 2008 comprised of positive EBITDA of $13
million during the first half of 2008 offset by negative EBITDA of $9 million
in the second half of the year due to the precipitous decline in UK
housing-related activity. In this environment of reduced demand and prices,
Norbord's North American OSB mills operated at 80% of capacity and European
mills operated at 85% of capacity during 2008. As a result, 2008 production
volumes retreated by 15% from the record annual OSB production volumes
achieved in 2007.
    Over the past five years, $1.1 billion in cash has been generated from
operating activities. This cash has been used to reshape the Company from its
historic role as a diversified Canadian forest products company to an
internationally recognized leader in the structural panel market. During this
time, Norbord achieved the following:

    
    -   Invested $375 million in growing the business
    -   Reduced net debt by $140 million
    -   Paid out $560 million in cash dividends including three special CAD
        $1.00 dividends
    -   Invested $100 million to repurchase 10.2 million common shares
    -   Distributed Fraser Papers Inc. to shareholders
    

    During 2008, the Company undertook several key initiatives to ensure it
comes out of this unprecedented cyclical downturn with sufficient capital
resources to solidify its position as an industry leader. During the year, the
Company successfully executed a Rights Offering to existing shareholders to
raise approximately $200 million of equity capital and reached an agreement
with its lenders to widen financial covenants and extend the term of its
revolving bank lines. The bank amendments are subject to customary conditions,
including the execution of definitive documentation, which the Company expects
to complete during the first quarter of 2009.

    Outlook for 2009

    No near-term relief is expected from housing market pressures in North
America or Europe in 2009. Most experts agree that the decline in US housing
was an early indicator of what has become a global financial meltdown and
believe that the recovery of US housing may also be the main driver in
eventually stabilizing financial markets and the economy.
    The National Bureau of Economic Research has declared that the US economy
has been in recession since December 2007. In its view, recessions have
averaged about 10 months in duration and it is forecasting this to be a longer
and deeper recession that is not expected to end before late 2009.
    In the short term, Norbord concurs with expert views that the US economy
will deteriorate further across most industries and regions. Restricted credit
availability and the resulting financial crisis have had an adverse effect on
consumer and business confidence and will likely lead to higher unemployment
and weak consumer spending in 2009. Home prices declined 12% in 2008 and are
expected to continue their decline in 2009.
    The underlying demographics continue to support long-term demand for new
homes. However, Norbord believes that several market adjustments must occur
before there is a sustainable improvement in housing starts, including:

    
    -   Government stimulus packages must filter through to the housing
        sector
    -   Falling house prices need to stabilize
    -   Mortgage lenders must support the return of qualified and first-time
        buyers back to the housing market
    -   The high inventory of new and used homes for sale must be absorbed
    

    Industry experts forecast annualized US housing starts will drop below
0.8 million in 2009, with the first half of the year at an even lower
annualized pace. Industry research also predicts that housing starts will
begin a moderate recovery in 2010 and the trend line should accelerate upwards
over the ensuing years.
    In Europe, the sharp decline in housing and financial markets is more
recent. However, in some markets, especially the UK, it has been faster and
more pronounced than the North American downturn. Markets for all products in
the UK and Europe are expected to soften in 2009.
    The economic recovery in the UK and the US will depend on financial
markets stabilization and credit availability for home builders. The Company
believes the UK market is not handicapped in the same manner as North America
by high inventories of new and used unsold homes. There is also a systemic
lack of available housing in the UK and thus pent up demand continues to grow.
    Combined, these factors suggest that there may be a faster recovery in
housing and panel demand once credit conditions improve and financial markets
achieve stability.
    Norbord benefited from the weakening of the Pound Sterling relative to
the Euro and US dollar in 2008 as most of our mills in Europe are located in
the UK. The currency shift makes it more difficult for competing panel
products to be imported into the UK and may provide an opportunity for Norbord
to increase exports of panel products from its UK mills into Continental
Europe.
    The dramatic escalation of energy and resin input prices through most of
2008 significantly impacted Norbord's production input costs. Management
believes energy and resin prices peaked in the fourth quarter and are now in
decline.
    Norbord intends to constrain capital expenditures to less than $25
million in 2009 which will be comprised of strictly essential maintenance and
limited productivity improvement and environmental projects.
    The relative difference in cost position among North American OSB
producers has moderated during 2008 as production curtailments taken across
the industry have reduced higher cost capacity. Norbord continues to be
comfortable with its cost position in this environment.
    The Company is confident that its long-term strategy, recent
recapitalization initiatives, and high-quality customer base in both North
America and Europe, combined with the active support of its major shareholder,
position the Company well to maintain its leadership position in the industry.

    
    Results of Operations

    -------------------------------------------------------------------------
    (US $ millions)             2008      2007      2006      2005      2004
    -------------------------------------------------------------------------
    Net sales               $    943  $  1,104  $  1,252  $  1,462  $  1,486
    EBITDA                       (60)       42       247       495       631
    EBITDA margin               (6)%        4%       20%       34%       42%
    Depreciation                  70        88        94        89        82
    Investment in property,
     plant and equipment          27        36       160       115        67
    -------------------------------------------------------------------------

    OSB shipments (MMsf 3/8")  4,088     4,463     4,289     4,136     3,731
    Average OSB price -
     North Central
     ($/Msf 7/16")               172       161       217       320       369
    Average OSB price -
     South East ($/Msf 7/16")    143       143       219       338       370
    Average OSB price -
     Europe (euro/m(3))          203       240       208       199       222
    -------------------------------------------------------------------------

    Markets

    North America is the principal market destination for Norbord's products.
North American OSB comprises 70% of Norbord's panel shipments by volume.
Therefore results of operations are most affected by volatility in North
American OSB prices. European panels comprise 27% of shipments by volume and
also affect Norbord's results, although to a lesser degree.

    -------------------------------------------------------------------------
    Shipments by market destination      North                2008      2007
     (MMsf-3/8")                       America    Europe     Total     Total
    -------------------------------------------------------------------------
    OSB                                  3,458       630     4,088     4,463
    Particleboard(1)                         -       398       398       631
    MDF                                    115       320       435       494
    Hardwood Plywood                        51         -        51        71
    -------------------------------------------------------------------------
    (1) Excludes particleboard consumed internally (2008 - 114 MMsf 3/8";
        2007 - 138 MMsf 3/8")
    


    North America

    The US economy experienced unprecedented turmoil in 2008 due to the
unforeseen instability in the financial markets. Many experts believe that
this accelerated downturn in the US economy was largely rooted in the housing
market decline.
    The lack of available credit in the US, combined with a dramatic increase
in foreclosure rates and the high inventory of new and existing homes for
sale, led to an unprecedented erosion in housing starts. New home construction
is the primary end use for OSB in North America, accounting for approximately
60% of OSB demand in 2008. The US housing downturn that began in 2006 has
accelerated throughout 2007 and 2008. US housing starts in 2008 were
approximately 0.9 million, down from 1.35 million in 2007 and 1.8 million in
2006. To put the decline into context, 100,000 housing starts represent
approximately 1 Bsf (3/8-inch basis) of OSB demand.
    According to APA - The Engineered Wood Association, the North American
structural panel industry produced approximately 31 Bsf (3/8-inch basis) of
panels in 2008, or 70% of total panel capacity. Specifically, OSB production
was approximately 19 Bsf, or 68% of total OSB capacity. OSB now represents
approximately 60% of total North American structural panel production. In
2008, Norbord's North American OSB mills operated at approximately 80% of
capacity compared to 100% in 2007.
    In addition to lower demand from housing, financial restrictions forced
many builders to modify operating plans and aggressively reduce their own
working capital levels. The combination of these factors has amplified the
slowdown in demand and created a challenging operating environment for
building material producers.
    The North American North Central OSB benchmark price averaged $172 per
Msf (7/16-inch basis) in 2008 compared to an average price of $161 per Msf in
2007 representing a modest 7% increase of $11 per Msf (7/16-inch basis). In
the South East region, where approximately 55% of Norbord's North American OSB
capacity is located, prices averaged $143 per Msf in both 2008 and 2007.
Benchmark prices reflected wide spread curtailments taken across the industry.
Modest price improvements did occur in some regions during 2008, however, key
input costs, primarily resin and wax, continued to rise. Some relief surfaced
at the end of the year as global commodity prices began to fall, a trend which
is expected to continue into 2009.

    Europe

    The economic downturn that began in the US has expanded globally.
Consumer confidence and housing-related spending across Europe have dropped
sharply as a result. In the UK, where the majority of Norbord's European
assets are located, housing starts fell 35% and housing prices declined 16% in
2008. Both indicators are expected to weaken further in 2009. As a result,
European OSB prices declined 15% in 2008 versus 2007 and in the UK,
particleboard prices were down 3% and MDF prices were unchanged. Year over
year, average annual particleboard and MDF prices were relatively unchanged.
However, prices for these products did trend down sharply in the second half
of 2008.
    European mills operated at 85% of capacity throughout the second half of
the year to contain costs and lower operating working capital. Throughout most
of 2008, Norbord's European business was disproportionately impacted by high
resin and global energy prices because Norbord's European products are more
resin and energy intensive to produce. Key input prices for energy and resin
did ease at the end of the fourth quarter. However, these cost reductions were
largely offset by downward pressure on panel pricing.

    
    -------------------------------------------------------------------------
                               Net Sales        Shipments  Average Mill Nets
                          (US $ millions)      (MMsf-3/8")(US $ per Msf-3/8")
                           2008     2007     2008     2007     2008     2007
    -------------------------------------------------------------------------
    OSB(1)              $   618  $   673    4,088    4,463  $   151  $   151
    Particleboard(2)         81      134      398      631      204      212
    MDF                     110      127      435      494      253      257
    Hardwood plywood         34       47       51       71      667      662
    Other(3)                100      123

    -------------------------------------------------------------------------
    Total               $   943  $ 1,104
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Includes European net sales of $142 million (2007 - $161 million).
    (2) Excludes particleboard consumed internally (2008 - 114 million square
        feet (MMsf) 3/8"; 2007 - 138 MMsf 3/8").
    (3) Other sales include I-joist, laminated products, furniture components
        and ready-to-assemble furniture units.


    Production

    -------------------------------------------------------------------------
    (MMsf-3/8")                     2008     2007     2006     2005     2004
    -------------------------------------------------------------------------
    OSB                            4,028    4,614    4,335    4,172    3,821
    Particleboard                    475      795      794      777      616
    MDF                              437      492      517      555      598
    Hardwood plywood                  51       71       79       78       79
    -------------------------------------------------------------------------
    

    During 2008, in a market environment of reduced demand, production
volumes were significantly curtailed company wide. North American OSB
production decreased by approximately 20% versus 2007 excluding the impact of
the production ramp-up of the new OSB line at Cordele which was completed in
2007. North American OSB mills operated at 80% of capacity compared to 100%
capacity in the prior year. Similarly, European panel production decreased by
20% in 2008 versus 2007 (excluding the impact of the Genk particleboard line
closure described below) as the European mills operated at 85% of capacity.
    The particleboard line at Genk was permanently closed in the first
quarter of 2008. Operations at the Genk OSB line were not impacted. The
particleboard line comprised older technology and was considered non-core at
the time the site was acquired in 2004. The Genk mill was acquired to expand
Norbord's OSB presence in Europe and, accordingly, the majority of the
purchase price was allocated to the OSB line.
    On December 1, 2008, Norbord and Kruger Inc. announced an agreement in
principle to form a 50/50 joint venture to combine their respective hardwood
plywood businesses. As of December 31, 2008, a Memorandum of Understanding has
been signed and the transaction is expected to close in the first quarter of
2009.
    Norbord will continue its practice of taking production curtailments in
2009 to minimize losses, conserve cash and manage operating working capital.
In January 2009, Norbord informed employees of its intention to suspend
production indefinitely at the Jefferson, Texas and Huguley, Alabama mills due
to the decline in OSB prices and demand.

    Operating Results

    In 2008, EBITDA was negative $60 million compared to positive $42 million
in 2007. Higher key input prices accounted for $81 million of the change in
EBITDA year over year. The modest 7% increase in North American OSB prices
from 2007 partially offset the negative impact of lower production volumes.
North American benchmark OSB prices averaged $172 in 2008, or approximately
30% below the historical five-year average. EBITDA margin was negative 6%
compared to positive 4% for the prior year. The components of the EBITDA
change are summarized in the variance table below.

    
    -------------------------------------------------------------------------
    EBITDA Variance                                            2008 vs. 2007
    (US $ millions)
    -------------------------------------------------------------------------

    EBITDA - current period                                         $    (60)
    EBITDA - comparative period                                           42
    -------------------------------------------------------------------------
    Variance                                                        $   (102)
    -------------------------------------------------------------------------

    North American mill nets(1)                                     $     28
    European mill nets(1)                                                (19)
    Volume(2)                                                            (38)
    Key input prices(3)                                                  (81)
    Key input usage(3)                                                     6
    Other(4)                                                               2
    -------------------------------------------------------------------------
                                                                    $   (102)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) The mill net variance represents the change in realized pricing
        across all products. Mill net is calculated as net sales divided by
        shipment volume.
    (2) The volume variance represents the impact of shipment volume changes
        across all products.
    (3) Key inputs include fibre, resin and energy.
    (4) Other category covers all remaining variances including labour and
        benefits, supplies and maintenance and the impact of foreign
        exchange.
    

    North American OSB generated EBITDA of negative $46 million (2007 -
negative $19 million). Norbord's European panel operations generated EBITDA of
 positive $4 million (2007 - positive $81 million). Other products generated
EBITDA of negative $5 million (2007 - negative $3 million). These figures
exclude unallocated corporate overhead relating to all product lines totalling
$13 million (2007 - $17 million).
    North American OSB achieved break-even EBITDA results in the second and
third quarters of 2008 which was a positive and notable achievement in light
of continued pressure on input costs from rising resin, fibre and global
energy prices and the impact of production curtailments during the year.
European operations achieved positive EBITDA of $13 million during the first
half of 2008 followed by negative EBITDA of $9 million during the second half
of the year. European OSB prices averaged 10% lower in the second half of 2008
versus the first half and 15% lower than 2007.
    Significantly higher input prices had a dramatic impact on the global
forest products industry in 2008. The upward pricing pressure was an economic
reality for the majority of the year although global commodity prices softened
towards the end of 2008. Global commodity input prices are expected to
moderate further in 2009. The price of energy, resin and fibre which account
for 70% of Norbord's production costs, have increased sharply over the past
five years. MIP gains of $14 million in 2008, measured relative to 2007 at
constant prices and exchange rates, limited the impact these higher input
prices had on earnings. Contributions to MIP in 2008 included key input usage
reduction initiatives, operating supplies, maintenance consumption initiatives
and general reduction in overhead. MIP gains were limited as weaker market
conditions resulted in a decline in production volumes and sales of certain
value-added products. Reduced operating rates will limit the visibility of
margin improvement efforts in 2009.
    Norbord's North American per unit OSB production costs in 2008 increased
9% over the prior year due to increased resin and wax, electricity, fibre and
gas prices in addition to the negative impact of reduced production volumes.
This was partially offset by the benefit of increased productivity and
improved key input usages.
    The direct impact on operating costs of rising energy prices for most of
2008 has been limited since all of Norbord's heat energy for OSB operations is
provided by burning bark and other biomass. Natural gas and electricity
satisfy the remainder of Norbord's energy requirements. Norbord continues to
look for ways to improve its level of energy self-sufficiency.
    Norbord's European operations are disproportionately impacted by rising
resin and global energy prices because Norbord's European products are more
resin and energy intensive. A number of initiatives have been undertaken to
address these cost pressures including the permanent closure of a
particleboard line at the Genk site during the first quarter of 2008 and the
installation of biomass heat energy systems at Genk OSB and Cowie MDF in 2007.
    Net sales for the year were $943 million, compared to $1.1 billion in
2007, which is an overall reduction of 15%. European net sales decreased by
20% and were primarily driven by lower pricing and shipment volumes. North
American net sales decreased by 9% due to lower shipment volumes offset by a
modest increase in North American OSB prices in the second and third quarters
of 2008.

    
    Interest, Depreciation and Income Tax

    -------------------------------------------------------------------------
    (US $ millions)                 2008     2007     2006     2005     2004
    -------------------------------------------------------------------------
    Interest and other income    $     3  $     5  $     3  $     5  $     6
    Interest expense                 (49)     (49)     (29)     (30)     (31)
    Depreciation                     (70)     (88)     (94)     (89)     (82)
    Income tax recovery (expense)     96       45      (17)    (133)    (183)
    -------------------------------------------------------------------------
    

    Interest

    In 2008, interest and other income was down over the prior year due to
higher average cash balances in 2007 principally arising from the $200 million
issue of senior notes completed in February 2007 to pre-fund the March 2008
debenture maturity. Interest expense of $49 million was relatively consistent
with the prior year. Interest of $3 million was capitalized to production
equipment in 2007 relating to the Cordele expansion.
    The effective interest rate on Norbord's debt-related obligations,
including the impact of interest rate swaps, was 6.2% at December 31, 2008,
compared to 7.1% at year-end 2007. Approximately 40% of Norbord's net debt was
subject to floating interest rates during the year. The decreased average rate
was the result of lower US money market rates in 2008 as the US Federal
Reserve continued cutting interest rates throughout the year, partially offset
by the coupon step-up applicable to the Company's 2017 senior notes.
    From time to time the Company can recoupon its portfolio of interest rate
swaps to more efficiently manage cash flow and credit exposure. Any gains or
losses realized are deferred and amortized over the remaining term of the debt
against which the swaps were designated as hedges. As at December 31, 2008, $8
million of gains were deferred and included in the carrying value of long-term
debt in the consolidated balance sheet. Amortization of $3 million in 2008 and
$8 million in 2007 was included in interest expense.

    Depreciation

    In accordance with the Company's policy, depreciation rates for property,
plant and equipment are assessed from time to time to ensure they continue to
approximate their useful life. Effective July 1, 2007, management's estimate
of the useful life of its OSB assets was changed from 15 years to 25 years.
This change in estimate was accounted for prospectively. The impact of this
change in estimate of depreciation was a reduction of approximately $18
million in 2007 and $36 million in 2008.

    Income tax

    A tax recovery of $96 million was recorded in 2008 on a pre-tax loss of
$212 million. The effective tax rate of 45% is higher than the statutory rate,
principally due to rate differences on foreign activities and fluctuations in
relative currency values.
    From 2004 to 2006, Norbord paid $234 million in income and income-related
taxes, principally in North America. In 2007 and 2008, the Company received
tax refunds of $33 million and $85 million respectively, related to over
installments and losses carried back. The economic stimulus package currently
being negotiated in the US Congress contains a proposal to extend the loss
carry back period from two to five years. Pending enactment of this stimulus
package as currently proposed, the Company would be entitled to approximately
$64 million in cash tax refunds.
    At December 31, 2008, the Company had tax operating loss carryforwards of
approximately pnds stlg 39 million from European operations. These losses can
be carried forward indefinitely. The Company has operating losses and capital
losses in Canada of CAD $22 million and CAD $13 million respectively. The
operating losses expire in 2028 and the capital losses can be carried forward
indefinitely. The Company also has approximately CAD $37 million of Investment
Tax Credits (ITCs) available to reduce future Canadian tax liabilities. The
ITCs expire between 2008 and 2017. The loss carryforwards and the credits may
be utilized over the next several years to eliminate cash taxes otherwise
payable, and will enhance future cash flows. The future tax benefits of these
temporary differences have been included in future income taxes in the
consolidated financial statements.
    Upon completion of their basic subscription privilege under the Rights
Offering on December 24, 2008, Brookfield's ownership interest in the Company
increased to approximately 60%. For Canadian tax purposes, the increased
ownership resulted in Brookfield acquiring control of the Company on December
24, 2008.
    As a result of the acquisition of control of the Company by Brookfield on
December 24, 2008, $8 million in future tax benefits was charged to retained
earnings in 2008 relating to capital loss carryforwards not available for
future use. Current Canadian tax legislation prohibits capital losses from
being used to shelter capital gains realized in fiscal periods subsequent to
the acquisition of control date. Certain draft Canadian legislation was
introduced in 2008 to permit the Company to elect to apply the available
capital losses against unrealized built-in gains on certain eligible assets as
at the acquisition of control date. These tax attributes will be reinstated in
the future when the pending draft income tax legislation is substantively
enacted.

    
    Liquidity and Capital Resources

    -------------------------------------------------------------------------
    (US $ millions, except
     per share information,
     unless otherwise noted)        2008     2007     2006     2005     2004

    Cash provided by (used for)
     operating activities        $   (13) $    15  $   191  $   314  $   562
    Cash provided by (used for)
     operating activities
     per share                     (0.09)    0.10     1.33     2.14     3.75
    -------------------------------------------------------------------------

    Operating working capital        (53)      23        -       19        2
    Investment in property,
     plant and equipment              27       36      160      115       67
    Net debt to capitalization,
     market basis                     32%      30%      27%      17%      13%
    Net debt to capitalization,
     book basis                       61%      60%      51%      35%      30%
    -------------------------------------------------------------------------
    

    Rights Offering

    On November 17, 2008, the Company filed a final short form prospectus
with securities regulators in Canada pursuant to a Rights Offering (the
Offering) for gross proceeds of approximately $200 million (CAD $240 million)
(see Capitalization). Under the Offering, the Company received gross proceeds
of $79 million (CAD $96 million) in 2008 and $120 million (CAD $144 million)
subsequent to year-end. Related issue costs of approximately $3 million have
been netted against the proceeds. The net proceeds were used to repay the term
debt facility and revolving bank lines.

    Term Debt Facility

    In the first quarter of 2008, the Company concluded a $100 million term
debt facility with Brookfield at an interest rate equal to the greater of 8%
and US base rate plus 1/2%. The facility matures in 2010 and is subordinated
to the Company's committed revolving bank lines. Any drawings under the
facility are treated as tangible net worth for bank line covenant purposes. At
December 31, 2008, $35 million was drawn as cash. In the fourth quarter of
2008, the Company repaid $40 million of the term debt facility and the
remaining $35 million was repaid subsequent to year-end, in each case using
proceeds from the Company's Offering. In conjunction with the revolving bank
line amendments discussed below, the term debt facility commitment will be
reduced from $100 million to $50 million and the term will be extended to June
2011.

    Revolving Bank Lines

    At year end, the Company had committed revolving bank lines of $235
million which mature in May 2010, bear interest at money market rates plus a
margin that varies with the Company's credit rating, and contain the following
financial covenants with which the Company must comply on a quarterly basis:
minimum tangible net worth of $300 million; and maximum net debt to total
capitalization, book basis, of 65%. On December 31, 2008, the Company's
tangible net worth was $301 million and net debt to total capitalization, book
basis, was 61%. At December 31, 2008, $57 million of the revolving bank lines
was drawn as cash, $4 million was utilized for letters of credit and $174
million was available to support the Company's liquidity requirements.
    In the fourth quarter of 2008, the Company reached an agreement with its
lenders to amend the terms of its revolving bank lines. The aggregate
revolving bank line commitment will be reduced from $235 million to $205
million, the term will be extended to May 2011 and the financial covenants
will be amended to the following: minimum tangible net worth of $250 million
and maximum net debt to total capitalization, book basis, of 70%. These
amendments are subject to customary conditions including the execution of 
definitive documentation, which the Company expects to complete during the
first quarter of 2009.
    At year end, the Company had unutilized liquidity of $259 million, net
debt to capitalization, book basis of 61%, and tangible net worth of $301
million. On a pro forma basis, Norbord will have access to approximately $300
million of liquidity, net debt to capitalization, book basis, of 51% and
tangible net worth of $384 million upon completion of these recapitalization
initiatives.
    Norbord has no investments in, or other direct exposure to, US sub-prime
mortgages, US auction rate securities or Canadian asset-backed commercial
paper.

    Senior Notes Due 2017

    In February 2007, the Company issued $200 million in senior notes due in
2017 with an interest rate of 6.45%, which are subject to a credit
ratings-based coupon step-up provision. At year-end, the interest rate was
7.95%. The notes were issued to pre-fund the March 2008 debenture maturity.
    The Company's outstanding long-term debt has a weighted average term of
4.9 years. Norbord's net debt stood at $477 million at year-end, representing
32% of capitalization on a market basis and 61% of capitalization on a book
basis. Net debt includes long-term debt of $497 million less cash and cash
equivalents of $20 million.

    Other Liquidity and Capital Resources

    Operating working capital, consisting of accounts receivable and
inventory less accounts payable and accrued liabilities was reduced by $76
million during the year, to negative $53 million at year-end compared to
positive $23 million at December 31, 2007. The 2008 and 2007 accounts
receivable balances are net of $68 million and $50 million, respectively, of
accounts receivable sold under a securitization facility. The facility was
established at $50 million in November 2007 and subsequently increased to $85
million in July 2008. Despite the current economic environment, Norbord's
accounts receivable metrics remain in line with prior periods. The Company
aims to minimize the amount of capital held as operating working capital and
took action to reduce this investment in conjunction with its production
curtailments over the year-end period. Total working capital at December 31,
2008, was negative $20 million which includes $20 million in cash and cash
equivalents and $13 million in tax receivable.
    Operating activities consumed $13 million in cash or $0.09 per share in
2008 compared to generating $15 million or $0.10 per share in 2007. The
decrease is principally due to a lower loss in the comparable period of the
prior year and payment of the litigation settlement partially offset by the
reduced investment in operating working capital and receipt of cash tax
refunds in 2008.
    In 2008, cash dividends of $33 million were paid (2007 - $32 million) and
$23 million of dividends were paid (2007 - $23 million) under the Company's
Dividend Reinvestment Plan (DRIP). The DRIP permits Canadian shareholders to
elect to receive their dividends in the form of common shares. On November 10,
2008, the Company announced the suspension of quarterly dividend payments on
its common shares. The dividend payment of CAD $0.10 on December 21, 2008 to
shareholders of record on December 1, 2008 was the last payment to be made
until further notice.
    The Company realized a gain of $26 million in 2008 on its matured net
investment hedges. Recouponing payments of $21 million (net) were made in 2007
on cross-currency swaps, which are designated as hedges against the Company's
net investments in Europe. The realized gains and recouponing payments were
offset by unrealized losses and gains on the net investments being hedged.
    From 2004 to 2006, Norbord paid $234 million in income and income-related
 taxes, principally in North America. In 2007 and 2008, the Company received
tax refunds of $33 million and $85 million, respectively, related to over
installments and losses carried back. The economic stimulus package currently
being negotiated in the US Congress contains a proposal to extend the loss
carryback period from two to five years. Pending enactment of this stimulus
package as currently proposed, the Company would be entitled to approximately
$64 million in cash tax refunds.
    The following table summarizes the aggregate amount of future cash
outflows for contractual obligations:

    
    -------------------------------------------------------------------------
                                                 Payments Due by Period

                                                      One-    Four-    After
    Contractual Obligations              Less than   Three     Five     Five
     (US $ millions)               Total  One Year   Years    Years    Years
    -------------------------------------------------------------------------
    Long-term debt,
     including interest          $   734  $    35  $   156  $   287  $   256
    Purchase obligations              82       33       47        2        -
    Operating leases                  12        3        5        2        2
    -------------------------------------------------------------------------

    Total                        $   828  $    71  $   208  $   291  $   258
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Note:  The above table does not include pension and post-retirement
           benefits plan obligations which are discussed in the Significant
           Accounting Policies and Estimates - Defined Benefit Pension Plans
           section.
    

    INVESTMENTS AND DIVESTITURES

    Investment in Property, Plant and Equipment

    Investment in property, plant and equipment in 2008 was $27 million
representing approximately 40% of depreciation. Approximately $12 million of
the $27 million invested was related to advanced air emission controls in
compliance with US Environmental Protection Agency MACT standards.
    Investment in property, plant and equipment was limited in 2008 and 2007
to reflect market conditions. In 2006 and 2005, investment in property, plant
and equipment was higher compared to normalized levels as the Company took
advantage of strong earnings to expand capacity at the Cordele mill, to
accelerate higher-return capital projects, particularly focused on energy
reduction and production enhancement, and to meet MACT requirements.
    In 2006, investment in property, plant and equipment included the second
OSB line at Cordele, which was completed in December 2006, on time and on
budget, creating one of the largest and most efficient OSB manufacturing
facilities in the world. The expansion added approximately 550 Msf (3/8-inch
basis) of production capacity at a capital cost of $135 million and increased
Norbord's North American OSB production capacity by 15%. In addition to the
capital cost of $135 million, $11 million of interest and $7 million in
start-up costs were capitalized from the time construction began in 2005.
    Norbord's 2009 investment in property, plant and equipment is expected to
be constrained to $25 million for essential capital projects and will be
funded with cash on hand, cash generated from operations and, if necessary,
drawings under the Company's committed revolving bank lines or term debt
facility.
    The following table summarizes Norbord's investment in property, plant
and equipment over the past five years:

    
    -------------------------------------------------------------------------

    (US $ millions)                     2008    2007    2006    2005    2004
    -------------------------------------------------------------------------
    Increased productivity            $    3  $   20  $   32  $   34  $   39
    Environmental                         13       2       6      28      11
    Maintenance of business               11      11      18      14      17
    Greenfield and major expansion         -       -      97      38       -
    Capitalized interest                   -       3       7       1       -
    -------------------------------------------------------------------------
    Total                             $   27  $   36  $  160  $  115  $   67
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    CAPITALIZATION

    Issue of Common Shares and Warrants

    On November 17, 2008, the Company filed a final short form prospectus
with securities regulators in Canada pursuant to the Offering for gross
proceeds of approximately $200 million (CAD $240 million). Under the Offering,
the Company distributed rights to existing eligible shareholders to purchase
272.6 million units at a price of CAD $0.88 per unit. Each unit consisted of
one common share and one-half of a common share purchase warrant. One whole
common share purchase warrant entitles the holder to purchase one common share
at a price of CAD $1.36 at any time prior to December 24, 2013.
    On December 24, 2008, pursuant to the basic and additional subscription
privileges, the Company issued 109.6 million common shares and 54.8 million
warrants to shareholders that exercised rights under the Offering and received
gross proceeds of $79 million (CAD $96 million). Net proceeds received were
used to repay the drawings under term debt facility and revolving bank lines.
    Under a Standby Purchase Agreement entered into in connection with the
Offering, Brookfield agreed to purchase any units not otherwise subscribed for
by other shareholders of the Company for a standby fee equal to 1% of gross
proceeds from the Offering. Subsequent to year-end, Brookfield purchased 163
million common shares and 81.5 million warrants under the Standby Purchase
Agreement for gross proceeds of $120 million (CAD $144 million). Related share
issue costs of approximately $3 million have been netted against proceeds. Net
proceeds received subsequent to year-end were used to repay the drawings under
 the term debt facility and revolving bank lines.

    Issue of Senior Notes

    In 2007, the Company issued $200 million in senior notes due 2017 with an
interest rate of 6.45%, which are subject to a credit ratings-based coupon
step-up provision. At year-end, the interest rate was 7.95% and during the
year the average interest rate was 7.61%. The notes were issued to pre-fund
the March 2008 debenture maturity and the issue was completed one year early
to mitigate potential refinancing risk.

    Repurchase of Long-Term Debt

    In 2008, the 8 1/8% debentures due 2008 with a principal value of $197
million were repurchased. The repurchase was pre-funded by the February 2007
issuance of $200 million in senior notes due in 2017 which was completed one
year early to mitigate potential refinancing risk.
    In 2007, the Company repurchased $3 million of the 8 1/8% debentures due
2008 and unwound a corresponding amount of interest rate swaps. There was no
gain or loss on the debenture repurchase or unwinding the interest rate swaps.


    
    Selected Quarterly Information

    (US $ millions,
     except per share             2008                        2007
     information,     -------------------------------------------------------
     unless otherwise   4th    3rd    2nd    1st    4th    3rd    2nd    1st
     noted)             Qtr    Qtr    Qtr    Qtr    Qtr    Qtr    Qtr    Qtr
    -------------------------------------------------------------------------

    Key Performance Metrics

    Return on equity
     (ROE)             (45)%  (28)%  (50)%  (37)%  (14)%   (1)%  (15)%  (15)%
    Return on capital
     employed (ROCE)   (12)%   (4)%     0%   (9)%   (3)%    11%     6%     2%
    Cash provided
     by (used for)
     operating
     activities        (12)    (8)     88   (81)    72     (18)    11    (50)
    Cash provided by
     (used for)
     operating
     activities
     per share        (0.08) (0.06)  0.60  (0.55)  0.49  (0.12)  0.07  (0.34)
    -------------------------------------------------------------------------

    Net Sales And Earnings

    Net sales           191    256    262    234    263    292    288    261
    EBITDA              (28)    (9)     1    (24)    (9)    30     17      4
    Earnings            (30)   (18)   (37)   (31)   (13)    (1)   (15)   (16)

    Per Common Share

    Earnings
      Basic           (0.19) (0.12) (0.25) (0.21) (0.09)  0.00  (0.11) (0.11)
      Diluted         (0.19) (0.12) (0.25) (0.21) (0.09)  0.00  (0.11) (0.11)
    -------------------------------------------------------------------------

    Key Statistics

    OSB shipments
     (MMsf 3/8")        891  1,124  1,114    959  1,130  1,060  1,161  1,112
    Average OSB price
     - North Central
     ($/Msf 7/16")      170    201    179    137    165    177    156    145
    Average OSB price
     - South East
     ($/Msf 7/16")      137    158    155    121    132    149    153    138
    Average OSB price
     - Europe
     (euro/m(3))        190    196    210    220    234    246    249    234
    -------------------------------------------------------------------------
    

    Quarterly results are impacted by seasonal factors such as weather and
building activity. Market demand varies seasonally, as homebuilding activity
and repair and renovation work, the principal end use for Norbord's products,
is generally stronger in the spring and summer months. Adverse weather can
also limit access to logging areas, which can affect the supply of fibre to
Norbord's operations. Shipment volumes and commodity prices are affected by
these factors as well as by global supply and demand conditions.
    The price of OSB in North America is one of the primary variables
affecting the comparability of Norbord's results over the past eight quarters.
Fluctuations in earnings during that time mirror fluctuations in the price of
OSB in North America. The Company estimates the annualized impact of a $10 per
Msf (7/16-inch basis) change in the North American OSB price on EBITDA when
operating at capacity is approximately $36 million or $0.09 per share.
Regional pricing variations, particularly in the US South, make the North
Central benchmark price a useful, albeit imperfect, proxy for overall North
American OSB pricing. Further, competition premiums obtained on value-added
products, the pricing lag effect of maintaining an order file, and volume and
trade discounts cause realized prices to differ from the benchmark.
    High global commodity prices caused upward pressure on the prices of key
input costs, primarily resin and wax, energy and fibre for most of 2008.
Downward trends in global energy prices started in the latter part of 2008 and
are expected to continue into 2009 providing some cost pressure relief.
    Norbord has relatively low exposure to the Canadian dollar due to a
comparatively small manufacturing base in Canada, comprising 13% of its panel
production capacity. The Company estimates that the unfavourable impact of a
US one cent increase in the Canadian dollar would negatively impact annual
EBITDA by approximately $1 million when Canadian OSB mills operate at
capacity.
    Items not related to ongoing business operations that had a significant
impact on quarterly results include the $32 million pre-tax expense ($0.21 per
share) related to the litigation settlement in the second quarter of 2008, and
the $4 million pre-tax expense ($0.03 per share) related to the severance
expenses for the permanent closure of a particleboard line at the Genk site in
the first quarter of 2008. In addition, the rate of depreciation has not been
constant over the past eight quarters as management changed its estimate of
the useful life of its OSB assets from 15 years to 25 years effective in the
third quarter of 2007. The impact of this change in estimate of depreciation
expense was approximately a $9 million reduction per quarter. In the second
quarter of 2007, depreciation expense increased $3 million as depreciation
commenced on the new OSB line at Cordele.

    LITIGATION SETTLEMENT

    Norbord and eight other North American OSB producers were named as
defendants in several lawsuits filed in the US District Court for the Eastern
District of Pennsylvania. The lawsuits alleged that these nine North American
OSB producers violated US and various state antitrust and other laws by
allegedly agreeing to fix prices and reduce the supply of OSB from June 1,
2002 through to at least February 2006.
    The Court certified: a nationwide class of persons and entities that
purchased OSB in the US directly from any of the defendant North American OSB
producers between June 1, 2002 and February 24, 2006; a nationwide class of
persons who, as end users, indirectly purchased in the US for their own use,
and not for resale, new OSB manufactured and sold by one or more of the
defendant North American OSB producers between June 1, 2002 and February 24,
2006 (other than persons who purchased OSB only as part of a house or other
structure); and a multi-state class of residents of seventeen States who, as
end users, indirectly purchased in the US for their own use, and not for
resale, new OSB manufactured and sold by one or more of the defendant North
American OSB producers between June 1, 2002 and February 24, 2006 (other than
persons who purchased OSB only as part of a house or other structure). All
three classes sought damages or injunctive or other relief under applicable
laws.
    Although Norbord vigorously contested the plaintiffs' allegations and
continues to deny that it violated US antitrust or any other laws, Norbord
entered into settlement agreements with the certified classes of direct and
indirect purchasers of OSB to limit the risks and costs associated with a
prolonged trial. Under the terms of the settlement agreements, which have been
approved by the Court, Norbord paid $30 million into an escrow account for the
benefit of members of the direct purchaser class and $2 million into an escrow
account for the benefit of members of the indirect purchaser classes.
    As allowed by Court order, a small number of class members chose to opt
out of the direct purchaser class; no members of the indirect purchaser
classes chose to opt out. Each entity that opted out of the direct purchaser
class is entitled to pursue its own individual "opt-out" claims against
Norbord and the other defendants. Norbord has entered into a settlement
agreement with one such entity. Norbord has also entered into an agreement
with the remaining entities that opted out of the direct purchaser class. The
terms of these agreements are not material to the Company.

    FOURTH QUARTER RESULTS

    Both North America and Europe were impacted by declining demand and
prices in the fourth quarter of 2008. Under normal economic conditions, a
seasonal slowdown is expected in the fourth quarter. The seasonal slowdown was
exacerbated during the fourth quarter of 2008 by extremely cautious customer
buying patterns. Overall, sales in the fourth quarter were down by
approximately 30% and shipment volumes were down by approximately 20% as
compared to the fourth quarter of 2007.
    In the quarter, North Central benchmark OSB prices averaged $170, down
$31 from the third quarter and up $5 from the fourth quarter of 2007. In the
South East region, where approximately 55% of Norbord's North American OSB
capacity is located, prices averaged $137 in the quarter, down $21 from the
previous quarter. European OSB prices retreated by 2% relative to the third
quarter of 2008 while particleboard and MDF prices decreased by approximately
6%. Production curtailments continued in the quarter in response to weak
demand. As a result, Norbord's North American OSB mills operated at 60% of
capacity and the European mills operated at 70% of capacity.
    In the quarter, Norbord recorded EBITDA of negative $28 million versus $9
million in the previous quarter and $9 million in the fourth quarter of 2007.
EBITDA changes are summarized in the variance table below.

    
    -------------------------------------------------------------------------
                                                  4th Qtr 2008  4th Qtr 2008
    EBITDA Variance                                    vs.          vs.
    (US $ millions)                               3rd Qtr 2008  4th Qtr 2007
    -------------------------------------------------------------------------

    EBITDA - current period                          $     (28)    $     (28)
    EBITDA - comparative period                             (9)           (9)
    -------------------------------------------------------------------------
    Variance                                         $     (19)    $     (19)
    -------------------------------------------------------------------------

    Mill nets(1)                                     $      (5)    $     (14)
    Volume(2)                                               (5)           (5)
    Key input prices(3)                                    (19)           (5)
    Key input usage(3)                                       -            (3)
    Other(4)                                                10             8
    -------------------------------------------------------------------------
                                                     $     (19)    $     (19)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) The mill net variance represents the change in realized pricing
        across all products. Mill net is calculated as net sales divided by
        shipment volume.
    (2) The volume variance represents the impact of shipment volume changes
        across all products.
    (3) Key inputs include fibre, resin and energy.
    (4) Other category covers all remaining variances including labour and
        benefits, supplies and maintenance, and the impact of foreign
        exchange.
    

    The Company recorded a loss of $30 million in the fourth quarter of 2008
or $0.19 per share compared to a loss of $18 million or $0.12 per share in the
third quarter of 2008. Lower fourth quarter earnings were due to lower EBITDA
offset by a higher tax recovery. EBITDA in the fourth quarter was lower due to
higher key input prices, primarily for resin, wax and lower OSB prices and
shipment volumes in both North America and Europe.
    The Company recorded a loss of $30 million in the fourth quarter of 2008
or $0.19 per share compared to $13 million or $0.09 per share in the fourth
quarter of 2007. Lower earnings versus the same quarter last year were due to
sales mix and a reduction in sales volume primarily due to significant
production curtailments in 2008 despite modestly higher OSB prices in North
America, higher key input prices for resin and energy and the impact of
reduced production on energy usages.
    Norbord's North American operations generated an EBITDA loss of $19
million in the fourth quarter of 2008 versus $15 million in the fourth quarter
of 2007 and $2 million in third quarter of 2008. North American OSB achieved
break-even EBITDA results in the third quarter of 2008 followed by negative
$18 million in the fourth quarter, primarily due to the effects of decreased
mill nets and production curtailments.
    In the fourth quarter, Norbord's North American per unit OSB cash
production costs increased by 7% over the third quarter of 2008 primarily due
to the impact of production curtailments and energy usages. Costs increased
12% over the fourth quarter of 2007 due to higher resin prices and the impact
of lower production volumes and, to a lesser extent, higher fibre and energy
prices. Norbord's North American OSB mills operated at approximately 60% of
capacity in the fourth quarter versus 90% of capacity in the third quarter of
2008 and almost full capacity in the fourth quarter of 2007.
    Norbord's European operations generated an EBITDA loss of $5 million and
$4 million in the third and fourth quarters of 2008, respectively, versus
positive $8 million in the fourth quarter of 2007. European pricing and
markets declined in the second half of the year. European results in the
quarter reflect a sharp deterioration of market conditions and continued key
input price pressure particularly for resin and energy. The European business
is disproportionately impacted by rising resin and global energy prices since
Norbord's European products are more resin and energy intensive. Norbord's
European mills operated at approximately 70% of capacity in the quarter,
compared to approximately 80% in the third quarter of 2008 and 100% in the
fourth quarter of 2007.
    Net sales in the quarter were $191 million, compared to $256 million and
$263 million in the third quarter of 2008 and fourth quarter of 2007
respectively. North American and European net sales in 2008 were down due to
lower selling prices and shipment volumes.

    COMMON SHARES

    At January 29, 2009, there were 431.7 million common shares outstanding.
The number of common shares outstanding in the year has increased over the
prior year principally due to issuance under the Offering and activity under
the DRIP. Under the DRIP, 12.2 million common shares were issued in 2008
compared to 2.8 million in 2007.
    Under the Rights Offering, the Company issued 109.6 million common shares
and 54.8 million warrants in 2008 to shareholders that exercised rights.
Subsequent to year-end, Brookfield purchased 163 million common shares and
81.5 million warrants pursuant to a Standby Purchase Agreement entered into in
connection with the Offering (see Capitalization).
    Shares issued under the Company's stock option plan totalled 0.1 million
in 2008, generating proceeds of less than $1 million. Options on 0.2 million
shares were exercised during 2007. Options on 3.3 million shares were
outstanding at year-end 2008, with approximately 30% vested. The exercise
prices for these options range from CAD $0.01 to CAD $11.13, with expiry at
various dates to 2017.
    The following table summarizes common share information for each of the
past five years.

    
    -------------------------------------------------------------------------
    Common Share Information
     as at December 31              2008     2007     2006     2005     2004
    -------------------------------------------------------------------------
    Shares outstanding
     (millions)                    268.7    146.8    143.7    144.8    149.3
    Dividends (US $ millions)    $    56  $    55  $   178  $   166  $   166
    Market price at year-end
     (CAD $)                     $  0.70  $  7.96  $  8.91  $ 12.25  $ 12.40
    -------------------------------------------------------------------------
    

    The total return on Norbord shares during 2008 was a loss of 86% as the
CAD $0.40 in dividend payments were offset by a decline in share price. The
average daily volume traded during 2008 was 0.7 million shares as compared to
0.6 million shares in 2007.

    TRANSACTIONS WITH RELATED PARTIES

    In the normal course of operations, the Company enters into various
transactions on market terms with related parties which have been measured at
exchange value and are recognized in the consolidated financial statements.
The following transactions have occurred between the Company and Brookfield
during the normal course of business:

    Rights Offering

    In connection with the Offering (see Capitalization), the Company entered
into a Standby Purchase Agreement with Brookfield, in which Brookfield agreed
to exercise all of its rights and to purchase any units not otherwise
subscribed for by other shareholders of the Company. For the year ended
December 31, 2008, Brookfield paid $72 million (CAD $87 million) to purchase
99.1 million common shares and 49.6 million warrants through their basic
subscription privilege which increased their ownership interest to
approximately 60% of the Company's issued and outstanding common shares. On
December 24, 2008, as a result of Brookfield's acquisition of control, $8
million in future income tax assets were charged to retained earnings. These
tax attributes will be reinstated in the future when pending Canadian income
tax legislation is substantively enacted. Subsequent to year-end, Brookfield
paid $120 million (CAD $144 million) to acquire 163 million common shares and
81.5 million warrants under the Standby Purchase Agreement, increasing their
ownership interest to approximately 75%. Subsequent to year end, a standby fee
of $2 million was paid to Brookfield and was based on 1% of the gross proceeds
of the Offering.

    Term Debt Facility

    In 2008, the Company concluded a $100 million term debt facility with
Brookfield. In conjunction with the revolving bank line amendments (see
Liquidity and Capital Resources) the facility commitment will be reduced to
$50 million and the term will be extended to June 2011.

    Dividend Reinvestment Plan (DRIP)

    In 2008, Brookfield elected to receive all of their dividends totaling
$21 million (2007 - $20 million) as common shares which were distributed under
the Company's DRIP. The DRIP permits Canadian shareholders to elect to receive
their dividends as common shares.

    Indemnity Commitment

    As at December 31, 2008, total future costs related to a 1999 asset
purchase agreement between the Company and Brookfield for which Norbord
provided an indemnity are estimated at less than $1 million and are included
in other liabilities in the consolidated balance sheet.

    Other

    In 2008 and 2007, the Company provided certain administrative services to
Brookfield or its affiliates which were charged on a cost recovery basis. In
addition, the Company periodically engages the services of Brookfield or its
affiliates for various financial, real estate and other business advisory
services. In 2008, the fees for these services were less than $1 million and
were charged at market rates.

    Guarantee of Certain Obligations of Fraser Papers Inc.

    Norbord continues to guarantee certain obligations under operating lease
commitments of Fraser Papers Inc. which was distributed to common shareholders
in 2004. The maximum potential amount of future payments that Norbord could be
required to make under these obligations is estimated to be $1 million. The
leases expire in March 2009. No amounts have been recorded in the consolidated
balance sheet with respect to these guarantees. As security for these ongoing
financial commitments to Fraser Papers Inc., Norbord has the right, at any
time, to require Fraser Papers Inc. to provide a fixed first charge security
interest over certain of Fraser Papers Inc.'s manufacturing facilities. In
2008, the fee for providing these guarantees was less than $1 million (2007 -
less than $1 million).

    FINANCIAL POLICIES

    Capital Allocation

    Norbord considers effective capital allocation to be critical to its
success. Capital is invested only when Norbord expects returns to exceed
pre-determined thresholds, taking into consideration both the degree and
magnitude of the relative risks and rewards and, if appropriate, strategic
considerations in the establishment of new business activities or maintenance
of existing business activities. Post-investment reviews are conducted on
capital investment decisions to assess the results against planned project
returns.

    Liquidity

    Norbord strives to maintain sufficient financial liquidity at all times
in order to participate in attractive investment opportunities as they arise,
as well as to withstand sudden adverse changes in economic circumstances.
Management forecasts cash flows for its current and subsequent fiscal years to
identify financing requirements. These requirements are then addressed through
a combination of committed credit facilities and access to capital markets.
    At year-end, Norbord had $20 million of cash on hand, $65 million
unutilized under a term debt facility and $174 million of unutilized committed
revolving bank lines with seven international financial institutions available
to support its liquidity requirements. Subsequent to year-end, Norbord
concluded the Offering (see Capitalization) and expects to conclude amendments
to its term debt facility and revolving bank lines during the first quarter of
2009 (see Liquidity and Capital Resources). On a pro forma basis for these
subsequent events, Norbord will have access to approximately $300 million in
liquidity.

    Credit Ratings

    Maintaining a stable balance sheet is an important element of Norbord's
financing strategy. Norbord believes that its record of superior operational
performance and prudent balance sheet management should enable it to access
public and private capital markets, subject to financial market conditions.

    
    At January 29, 2009, ratings on Norbord's senior debt securities were:

    -------------------------------------------------------------------------
                      Dominion Bond    Standard & Poor's   Moody's
                      Rating Service   Ratings Services    Investors Service
    -------------------------------------------------------------------------
    Rating            BB (high)        BB-                 Ba3
    Outlook           Negative         Negative            Negative
    -------------------------------------------------------------------------
    

    During 2008, Moody's, DBRS and S&P downgraded Norbord's credit ratings to
Ba3, BB(high) and BB- respectively, citing the weaker than expected US housing
market.
    Credit ratings are intended to provide investors with an independent
measure of the credit quality of any securities issue. The credit ratings
accorded to debt securities by the rating agencies are not recommendations to
purchase, hold or sell the debt securities, as such ratings do not comment as
to market price or suitability for a particular investor. There is no
assurance that any rating will remain in effect for any given period of time
or that any rating will not be revised or withdrawn entirely by a rating
agency in the future if, in its judgement, circumstances so warrant.

    Use of Financial Instruments

    Norbord uses derivative financial instruments solely for the purpose of
managing its interest rate, foreign exchange and commodity price exposures, as
further detailed in the Risks and Uncertainties section. These activities are
governed by Board-approved financial policies that cover risk identification,
tolerance, measurement and reporting. Derivative transactions are executed
only with approved high-quality counterparties under master netting
agreements. Derivative contracts that are deemed to be highly effective in
offsetting changes in the fair value, net investment or cash flows of hedged
items are designated as hedges of specific exposures and, accordingly, all
gains and losses on these instruments are recognized in the same manner as the
item being hedged.

    CHANGES IN ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING ESTIMATES

    Capital Disclosures

    In December 2006, the Canadian Institute of Chartered Accountants
("CICA") issued Section 1535, Capital Disclosures which requires the
disclosure of: (i) an entity's objectives, policies and process for managing
capital; (ii) quantitative data about an entity's managed capital; (iii)
whether or not an entity has complied with capital requirements; and (iv) if
an entity has not complied with such capital requirements, the consequences of
such non-compliance. This new standard became effective for the Company on
January 1, 2008, and the related disclosure is included as Note 15 to the
consolidated financial statements.

    Financial Instruments - Disclosure and Presentation

    In December 2006, the CICA issued two new accounting standards, Section
3862, Financial Instruments - Disclosures and Section 3863, Financial
Instruments - Presentation. These standards replace Section 3861, Financial
Instruments - Disclosure and Presentation and enhance the disclosure of the
nature and extent of risks arising from financial Instruments and how the
entity manages those risks. These new standards became effective for the
Company on January 1, 2008, and the related disclosure is included as Note 16
to the consolidated financial statements.

    Inventories

    In June 2007, the CICA issued Section 3031, Inventories, replacing
Section 3030. This standard provides guidance on the determination of the cost
of inventories and the subsequent recognition as an expense, including any
writedown to net realizable value. This new standard became effective for the
Company on January 1, 2008 and the related disclosure is included in Note 4 to
the consolidated financial statements.
    The impact of adopting this new standard was a $1 million reduction in
opening retained earnings and a $3 million reclassification of certain capital
spare parts from inventory to property, plant and equipment. The opening
retained earnings adjustment of $1 million arises due to a lower opening
carrying value of certain finished goods and raw material inventory and prior
years' depreciation on the reclassified capital spare parts. Effective January
1, 2008, inventories of raw materials and operating maintenance supplies are
valued at the lower of cost and net realizable value, with cost determined on
an average cost basis. Prior to adopting the new standard on January 1, 2008,
the Company valued these inventories at the lower of cost and replacement
cost. Capital spare parts of $3 million were reclassified from inventory to
property, plant and equipment at cost and are depreciated on a straight line
basis over two to five years, which approximates their useful lives.

    Significant Accounting Estimates

    Effective July 1, 2007, management's estimate of the useful life of its
OSB assets was changed from 15 years to 25 years. In accordance with the
Company's policy, depreciation rates for property, plant and equipment are
assessed from time to time to ensure that they continue to approximate their
useful life. This change in estimate was accounted for prospectively. The
impact of the change in estimate on 2007 depreciation was a reduction of
approximately $18 million. The impact on a full year of depreciation is a
reduction of approximately $36 million.

    Future Accounting Policy - Goodwill and Intangible Assets

    In February 2008, the CICA issued Handbook Section 3064, Goodwill and
Intangible Assets, replacing Handbook Sections 3062, Goodwill and Other
Intangible Assets and 3450, Research and Development Costs. Various changes
have been made to other sections of the CICA Handbook for consistency
purposes. The new section will be applicable to the financial statements
relating to fiscal years beginning January 1, 2009. The new section
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition of intangible
assets by profit-oriented enterprises. The Company is currently evaluating the
impact of Section 3064 on its consolidated financial statements.

    INTERNATIONAL FINANCIAL REPORTING STANDARDS

    The Accounting Standards Board (AcSB) confirmed in February 2008 that
International Financial Reporting Standards (IFRS) will replace Canadian GAAP
for publicly accountable enterprises for financial periods beginning on and
after January 1, 2011.

    Impact of Adoption of IFRS

    IFRS are premised on a conceptual framework similar to Canadian GAAP,
however, significant differences exist in certain matters of recognition,
measurement and disclosure. The following paragraphs outline the significant
accounting policies which are required or are currently expected to be applied
by the Company upon its adoption of IFRS that will be significantly different
than its Canadian GAAP accounting policies. As the Company continues to
evaluate the impact of adoption on its processes and accounting policies it
will provide updated disclosure where appropriate. While the adoption of IFRS
will not have a material impact on the reported cash flows of the Company, it
will have a material impact on the Company's consolidated balance sheet and
statement of income.

    Property, Plant and Equipment

    Consistent with Canadian GAAP, under IFRS, separable components of
property, plant and equipment are recognized initially at cost. Under
International Accounting Standard (IAS) 16 Property, Plant and Equipment an
entity is required to choose, for each class of property, plant and equipment,
to account for each class using either the cost model or the revaluation
model. The cost model is generally consistent with Canadian GAAP where an item
of property, plant and equipment is carried at its cost less any accumulated
depreciation and any accumulated impairment losses. Under the revaluation
model an item of property, plant and equipment is carried at its revalued
amount, being its fair value at the date of the revaluation less any
accumulated depreciation and accumulated impairment losses.

    Impairments

    Under Canadian GAAP for assets other than financial assets, a write-down
to estimated fair value is recognized if the estimated undiscounted future
cash flows from an asset or group of assets is less than their carried value.
Under IFRS, IAS 36 Impairment of Assets requires a write-down to be recognized
if the recoverable amount, determined as the higher of the estimated fair
value less costs to sell or value in use, is less than carried value.
Consistent with Canadian GAAP, impairments are measured at the amount by which
carried value exceeds fair value less costs to sell.

    Employee Benefits

    Under Canadian GAAP, accrued pension benefit obligation in excess of plan
assets for defined benefit pension plans are required to be disclosed within
the notes to the consolidated financial statements. Under IFRS, IAS 19
Employee Benefits requires the obligation in excess of plan assets to be
recorded as a liability on the balance sheet.

    Financial Instruments

    Norbord has transferred substantially all of its present and future trade
accounts receivable to a highly rated financial institution, on a fully
serviced basis, for proceeds consisting of cash and deferred purchase price.
Under Canadian GAAP, this represents a true sale of accounts receivable. Under
IFRS, IAS 39 Financial Instruments: Recognition and Measurement this transfer
would be recorded on the Company's balance sheet as a financing arrangement.

    Share-based Payment

    The Company issues stock-based awards in the form of stock options that
vest evenly over a five year period. Under Canadian GAAP Norbord recognizes
the fair value of the award, determined at the time of the grant, on a
straight-line basis over the five year vesting period. Under IFRS the fair
value of each tranche of the award is considered a separate grant based on the
vesting period with the fair value of each tranche determined separately and
recognized as compensation expense over the term of its respective vesting
period. Accordingly, this will result in a higher amount of each grant being
recognized in income at a faster rate than under Canadian GAAP.

    First-time Adoption of International Financial Reporting Standards

    Norbord's adoption of IFRS will require the application of IFRS 1
First-time Adoption of International Financial Reporting Standards (IFRS 1),
which provides guidance for an entity's initial adoption of IFRS. IFRS 1
generally requires that an entity apply all IFRS effective at the end of its
first IFRS reporting period retrospectively. However, IFRS 1 does require
certain mandatory exceptions and limited optional exemptions in specified
areas of certain standards from this general requirement. The following are
the optional exemptions available under IFRS 1 significant to Norbord that the
Company expects to apply in preparing its first financial statements under
IFRS.

    Fair value of revaluation as deemed cost

    IFRS 1 allows an entity to initially measure an item of property, plant
and equipment upon transition to IFRS at fair value, as opposed to recreating
depreciated cost under IFRS. The Company will, for items of property, plant
and equipment, use fair value as deemed cost. Norbord expects to use a measure
of deemed cost for a significant portion of its fixed assets, the cumulative
effect of which will generally result in carrying values under IFRS in excess
of those under Canadian GAAP. This increase in carrying value is the result of
the accounting depreciation taken under Canadian GAAP no longer attributed to
the assets at transition, in addition to the value appreciation of such assets
in aggregate since acquisition.

    Cumulative translation differences

    IAS 21 The Effects of Changes in Foreign Exchange Rates requires a
company to determine the translation differences in accordance with IFRS from
the date on which a subsidiary was formed or acquired. IFRS allows cumulative
translation differences for all foreign operations to be deemed zero at the
date of transition to IFRS, with future gains or losses on subsequent disposal
of any foreign operations to exclude translation differences arising from
prior to the date of transition to IFRS. Norbord expects to reset all
cumulative translation differences to zero on transition to IFRS.

    Employee Benefits

    On adoption of IFRS, the Company is allowed to record all deferred
actuarial gains and losses through equity. Once recorded, the Company can
continue to record actuarial gains and losses on a systematic and consistent
basis, subject to a minimum required amortization based on a "corridor"
approach. The "corridor" is 10% of the greater of the accrued benefit
obligation at the beginning of the year and the fair value, or market related
value, of plan assets at the beginning of the year. When amortization is
required, the excess over the corridor amount should be amortized over a
period no longer than the employees' average remaining service period.

    Share-based payments

    On adoption of IFRS, an entity is not required under IFRS 2 Share-based
Payment (IFRS 2) to recognize share-based payments settled before the entity's
IFRS transition date. IFRS 1 encourages, but does not require, application of
its provisions to equity instruments granted on or before November 7, 2002.
Norbord will recognize under IFRS 2 the share-based awards that were
recognized under Canadian GAAP.
    IFRS 1 allows for certain other optional exemptions; however, the Company
does not expect such exemptions to be significant to the Company's adoption of
IFRS.

    SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

    Revenue Recognition

    Net sales are recognized when the risks and rewards of ownership pass to
the purchaser. This is generally when goods are shipped. Sales are recorded
net of third-party transportation and discounts.
    Sales are governed by contract or by standard industry terms. Revenue is
not recognized prior to the completion of those terms. The majority of product
is shipped via third-party transport on a freight-on-board shipping point
basis. In all cases, product is subject to quality testing by the Company to
ensure it meets applicable standards prior to shipment.

    Inventories

    Inventories of raw materials and operating and maintenance supplies are
valued at the lower of cost and net realizable value, with cost determined on
an average cost basis.
    Inventories of finished goods are valued at the lower of cost and net
realizable value, with cost determined on an average cost basis. Cost includes
direct material, direct labour and an allocation of overhead.

    Property, Plant and Equipment

    Property, plant and equipment are recorded at cost, including capitalized
interest. Government capital grants and investment tax credits received reduce
the cost of related assets. Property, plant and equipment acquired in a
business acquisition are recorded at fair value. Property, plant and equipment
are depreciated on a straight-line basis. The rates of depreciation are
intended to fully depreciate manufacturing and non-manufacturing assets over
the following periods, which approximate their useful lives.

    
        Buildings 20 to 40 years
        Production equipment 10 to 25 years
    

    These periods are assessed from time to time to ensure that they continue
to approximate the useful lives of the related assets. Property, plant and
equipment are tested for recoverability whenever events or changes in
circumstances indicate the carrying amount may not be recoverable. The
recoverability assessment is based on the Company's estimates and assumptions.
If these estimates change in the future, the Company could be required to
reduce the carrying value of property, plant and equipment resulting in an
impairment charge.

    Future Income Taxes

    Future income tax assets and liabilities are determined based on
temporary differences between the carrying amount and tax basis of assets and
liabilities as well as certain carryforward items. Future income tax assets
are recognized only to the extent that, in the Company's opinion, it is more
likely than not that the future income tax assets will be realized. This
opinion is based on certain estimates and assumptions. If these estimates or
assumptions change in the future, the Company could be required to reduce or
increase the value of the future income tax assets resulting in income tax
expense or recovery. The Company evaluates its future income tax assets
periodically.

    Defined Benefit Pension Plans

    Norbord's defined benefit pension plans are funded in accordance with all
applicable regulatory requirements. Norbord's obligations under its defined
benefit pension plans are determined periodically through actuarial
valuations, which are the basis for calculating pension expense. The weighted
average assumed return on assets is 7.8% and is based on management's best
estimate of the long-term expected rate of return on plan assets, including
consideration of asset mix, equity risk premium and active investment
management premium. The weighted average discount rate used to value year-end
2008 accrued benefit obligations is 6.4% and is based on the market yield of
high-quality corporate bonds of similar duration to the pension plan
liabilities.
    At December 31, 2008, defined benefit pension plan assets were $40
million (2007 - $59 million) while the accrued benefit obligations were $54
million (2007 - $81 million), yielding an unfunded liability of $14 million
(2007 - $22 million). Defined benefit pension expense for the year was $3
million (2007 - $3 million) and defined benefit employer contributions were $4
million (2007 - $4 million). Norbord anticipates 2009 net pension expense and
employer contributions will be in line with 2008 levels.
    Significant changes in assumptions, driven by changes in financial
markets, asset performance different from the assumed rate of return,
significant new plan enhancements, acquisitions, divestitures, changes in the
regulatory environment, and the measurement uncertainty incorporated into the
actuarial valuation process could materially affect Norbord's future plan
assets, accrued benefit obligations, pension expense and pension
contributions.

    Stock-Based Compensation

    The Company accounts for stock options using the fair value method. Under
this method, compensation expense for options is measured at the grant date
using the Black-Scholes option pricing model based on certain estimates and
assumptions and is recognized on a straight-line basis over the vesting
period. In 2008, the Company recognized $2 million in compensation expense
related to stock options (2007 - $1 million). If estimates or assumptions
change in the future, the Company could be required to reduce or increase
contributed surplus, resulting in compensation expense or recovery.

    RISKS AND UNCERTAINTIES

    Norbord is exposed to a number of risks and uncertainties in the normal
course of its business that could have a material adverse effect on the
Company's business, financial position, operating results and cash flows. A
discussion of some of the major risks and uncertainties follows.

    Product Price Sensitivities

    OSB accounts for almost 80% of Norbord's panel production capacity. The
price of OSB is one of the most volatile in the wood-based panels industry.
Norbord's concentration in OSB increases its sensitivity to product pricing
and may result in a high degree of sales and earnings volatility.
    Norbord's financial performance is principally dependent on the selling
price of its products. Most of Norbord's products are globally traded
commodities for which no liquid futures markets exist. The markets for most of
Norbord's products are highly cyclical and are characterized by periods of
supply and demand imbalance during which its product prices have tended to
fluctuate significantly. In addition, since many of Norbord's products are
used for new home construction, seasonal and annual weather changes can affect
demand and sale volumes. These imbalances, which may affect different areas of
Norbord's business at different times, are influenced by numerous factors that
are beyond Norbord's control and include: changes in global and regional
production capacity for a particular product or group of products; changes in
the end use of those products or the increased use of substitute products; and
the overall level of economic activity in the regions in which Norbord
conducts business. Norbord has been negatively affected in the past by
declines in product pricing and has taken production downtime to manage
working capital and minimize cash losses.
    Based on operating at full capacity, the following table shows the
approximate annualized impact of changes in product prices on EBITDA.

    
    -------------------------------------------------------------------------
                          Sensitivity Factor                Impact on EBITDA
                                                            ($ millions)
    -------------------------------------------------------------------------
    OSB - North America    $10 per Msf-7/16"                              36
    OSB - Europe           (euro)10 per m3                                 7
    Other panels           $10 per Msf-7/16"                               9
    -------------------------------------------------------------------------
    

    Competition

    The wood-based panels industry is a highly competitive business
environment in which companies compete, to a large degree, on the basis of
price. Norbord's principal market is the United States where it competes with
North American and, in some instances, foreign producers. Norbord's European
operations compete primarily with other European producers. Certain
competitors may have lower cost facilities than Norbord. Norbord's ability to
compete in these and other markets is dependent on a variety of factors such
as manufacturing costs, availability of key production inputs, continued free
access to markets, customer service, product quality, financial resources and
currency exchange rates. In addition, competitors could develop new cost-
effective substitutes for Norbord's wood-based panels, or building codes could
be changed to make the use of Norbord's products less attractive for certain
applications.

    Customer Dependence

    Norbord sells its products primarily to major retail chains, contractor
supply yards, and wholesale distributors and faces strong competition for the
business of significant customers. In 2008, Norbord had one customer whose
purchases represented greater than 10% of total net sales. Norbord generally
does not have contractual assurances as to future sales. As a result, any
significant customer order cancellations could negatively affect Norbord's
sales and earnings. Continued consolidation in the retail industry could
expose Norbord to increased concentration of customer dependence and increase
customers' abilities to exert pricing pressure on Norbord.

    Manufacturing Inputs

    Norbord is exposed to commodity price risk on most of its manufacturing
inputs, principally wood fibre, resin and energy. These manufacturing inputs
are purchased primarily on the open market in competition with other users of
such resources, and prices are influenced by factors beyond Norbord's control.
Norbord may not be able to hedge the purchase price of manufacturing inputs or
pass increased costs through to its customers.

    Fibre Resource

    As Norbord does not own any timberlands, it purchases timber, wood chips
and other wood fibre as well as recycled materials on the open market in
competition with other users of such resources where prices are influenced by
factors beyond Norbord's control.
    Norbord's wood fibre supply comes from several different sources. In the
US, roundwood logs are primarily sourced from private and industry owned
woodlands. The MDF mill also purchases wood chips and sawdust from local
sawmills. In Europe, wood fibre is purchased from government and private
landowners. Fibre for OSB comes from roundwood logs while the MDF and
particleboard mills source fibre in the form of roundwood logs, wood chips,
sawdust and recycled wood. Norbord's Canadian mills hold forestry licences and
agreements to source poplar and birch from Crown timberlands in Ontario and
Quebec. Most of this volume is harvested and delivered by third parties that
also hold licences to operate in these areas.
    The Crown licences require the payment of stumpage fees for the timber
harvested, and compliance with specified rehabilitation and silvicultural
management practices. The licences cover periods ranging from 20 to 25 years
and are renewed or extended every 5 years. They can be revoked or cancelled
for non-performance and contain terms and conditions that could, under certain
circumstances, result in a reduction of annual allowable timber that may be
harvested by Norbord without any compensation.

    Labour Relations

    Norbord's US employees are non-unionized while its UK, Belgian and most
of its Canadian employees are unionized - representing just under one-half of
the workforce. All of Norbord's UK and Belgian union contracts are evergreen.
Canadian union contracts typically cover a three- to five-year term.
    In 2007, a new five-year agreement expiring May 31, 2012, was negotiated
with the Steelworkers Union representing members at the Cochrane, Ontario,
hardwood plywood mill. In 2008, a new five-year agreement expiring December
31, 2012, was negotiated with the Teamsters union representing members at the
Val-d'Or, Quebec, OSB mill. The Communications, Energy and Paperworkers Union
contract covering members at the La Sarre, Quebec OSB mill expires on June 30,
2009. Strikes or work stoppages could result in lost production and sales,
higher costs or supply constraints if Norbord is unable to negotiate
acceptable contracts with its various trade unions.

    Environmental Matters

    Norbord's operations are subject to a range of general and industry-
specific environmental laws and regulations relating to air emissions,
wastewater discharges, solid and hazardous waste management, plant and
wildlife protection, and site remediation. Failure to comply with applicable
environmental laws and regulations could result in fines, penalties or other
enforcement actions that could impact Norbord's production capacity or
increase Norbord's production costs. Norbord has incurred, and expects to
continue to incur, capital expenditures and operating costs to comply with
applicable environmental laws and regulations. In addition, environmental laws
and regulations could become more stringent in the future.

    Product Liability

    Norbord produces a variety of wood-based panels that are used in new home
construction, repair and remodeling of existing homes, furniture and fixtures,
and industrial applications. In the normal course of business, the end users
of Norbord's products have in the past, and could in the future, make claims
with respect to the fitness for use of its products or related to product
quality or performance issues. Norbord could face increased costs if any
future claims exceed purchased insurance coverage.

    Natural Events

    Norbord's business is exposed to numerous natural events such as forest
fires, adverse weather conditions, insect infestation, disease, prolonged
drought, and other natural disasters, which are not insurable events. If such
an event occurs, Norbord may need to curtail production or incur increased
fibre or other costs.

    Capital Intensity

    The production of wood-based panels is capital intensive. There can be no
assurance that key pieces of equipment will not need to be repaired or
replaced. In certain circumstances, the costs of repairing or replacing
equipment and the associated downtime of the affected production line may not
be an insurable event.

    Tax Exposures

    Norbord takes various tax filing positions in the normal course of
business and there can be no assurance that tax authorities will not challenge
such filing positions. In addition, Norbord is subject to further
uncertainties concerning the interpretation and application of tax laws in
various operating jurisdictions. Norbord maintains reserves for known
estimated tax exposures in all jurisdictions. These exposures are settled
primarily through the closure of audits with the jurisdictional taxing
authorities. However future settlements could differ materially from the
Company's reserves.

    Currency Exposures

    Norbord reports its financial results in US dollars. A portion of
Norbord's product prices and costs are influenced by relative currency values
(particularly the Canadian dollar, Pound Sterling and Euro). Significant
fluctuations in relative currency values could negatively affect the cost
competitiveness of Norbord's facilities, the value of its foreign investments,
the results of its operations and its financial position.
    Norbord's foreign exchange exposure arises from the following sources:

    
    -   Net investments in self-sustaining foreign operations, limited to
        Norbord's investment in its European operations
    -   Net Canadian dollar-denominated monetary assets and liabilities
    -   Committed or anticipated foreign currency transactions, primarily
        Canadian dollar costs in Norbord's Canadian operations and Euro
        revenues in Norbord's UK operations


    ASSESSMENT AND CHANGES IN INTERNAL CONTROLS AND DISCLOSURE CONTROLS OVER
    FINANCIAL REPORTING
    

    In accordance with the requirements of National Instrument 52-109
Certification of Disclosure in Issuer's Annual and Interim Filings, the
Company's management, including the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), have evaluated the operating effectiveness of the
Company's internal control over financial reporting. Management of Norbord is
responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a process
designed by, or under the supervision of, the CEO and the CFO and effected by
management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Management assessed the effectiveness of the Company's internal
control over financial reporting as of December 31, 2008. Based on this
assessment, management believes that, as of December 31, 2008, the Company's
internal control over financial reporting is operating effectively. Management
determined that there were no material weaknesses in the Company's internal
control over financial reporting as of December 31, 2008. There have been no
changes in Norbord's internal control over financial reporting during the year
ended December 31, 2008, that have materially affected, or are reasonably
likely to materially affect its internal control over financial reporting.
    Disclosure controls and procedures are designed to provide reasonable
assurance that all relevant information is gathered and reported to senior
management, including the CEO and CFO, on a timely basis so that appropriate
decisions can be made regarding annual and interim financial statement
disclosure. An evaluation of the effectiveness of the design and operation of
disclosure controls and procedures was conducted as of December 31, 2008, by
Norbord's management, including the CEO and CFO. Based on this evaluation, the
CEO and CFO have concluded that Norbord's disclosure controls and procedures
as defined in National Instrument 52-109, Certification of Disclosure in
Issuers' Annual and Interim Filings, are effective.

    NON-GAAP FINANCIAL MEASURES

    The following non-GAAP financial measures have been used in this MD&A.
Non-GAAP financial measures do not have any standardized meaning prescribed by
GAAP and are therefore unlikely to be comparable to similar measures presented
by other companies. Each non-GAAP financial measure is defined below. Where
appropriate, a quantitative reconciliation of the non-GAAP financial measure
to the most directly comparable GAAP measure is provided.

    EBITDA is earnings determined in accordance with GAAP from continuing
operations before interest, premium on early extinguishment of debt,
litigation settlement, provision for non-core operation, income tax,
depreciation and amortization. As Norbord operates in a cyclical commodity
business, Norbord interprets EBITDA over the cycle as a useful indicator of
the Company's ability to incur and service debt and meet capital expenditure
requirements. In addition, Norbord views EBITDA as a measure of gross profit
and interprets EBITDA trends as indicators of relative operating performance.
The following table reconciles EBITDA to the most directly comparable GAAP
measure:

    
    -------------------------------------------------------------------------
    (US $ millions)             2008      2007      2006      2005      2004
    -------------------------------------------------------------------------
    Earnings                 $  (116)  $   (45)  $    97   $   248   $   326
    Less: Earnings from
     discontinued operations       -         -         -         -         6
    Add: Premium on early
     extinguishment of debt,
     net                           -         -         -         -         9
    Add: Litigation settlement    32
    Add: Provision for
     non-core operation            4         -        13         -         -
    Add: Interest expense         49        49        29        30        31
    Less: Interest and
     other income                 (3)       (5)       (3)       (5)       (6)
    Add: Income tax expense
     (recovery)                  (96)      (45)       17       133       183
    Add: Depreciation             70        88        94        89        82
    -------------------------------------------------------------------------
    EBITDA                   $   (60)  $    42   $   247   $   495   $   631
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    EBITDA margin (%) is EBITDA as a percentage of net sales. When compared
with industry statistics and prior periods, EBITDA margin can be a useful
indicator of operating efficiency and a company's ability to compete
successfully with its peers. Norbord interprets EBITDA margin trends as
indicators of relative operating performance.

    Operating working capital is accounts receivable plus inventory less
accounts payable and accrued liabilities. Operating working capital is a
measure of the investment in accounts receivable, inventory, accounts payable
and accrued liabilities required to support operations. The Company aims to
minimize its investment in operating working capital, however, the amount will
vary with seasonality, and sales expansions and contractions.

    
    -------------------------------------------------------------------------
    (US $ millions)             2008      2007      2006      2005      2004
    -------------------------------------------------------------------------
    Accounts receivable      $    12   $    83   $   130   $   145   $   150
    Inventory                     81       131        98        99        90
    Accounts payable and
     accrued liabilities        (146)     (191)     (228)     (225)     (238)
    -------------------------------------------------------------------------
    Operating working
     capital                 $   (53)  $    23   $     -   $    19   $     2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Total working capital is operating working capital plus cash and cash
equivalents and tax receivable (payable).

    -------------------------------------------------------------------------
    (US $ millions)             2008      2007      2006      2005      2004
    -------------------------------------------------------------------------
    Operating working
     capital                 $   (53)  $    23   $     -   $    19   $     2
    Cash and cash
     equivalents                  20       128        20       155       215
    Tax receivable (payable)      13        89        33        (2)       (3)
    -------------------------------------------------------------------------
    Total working capital    $   (20)  $   240   $    53   $   172   $   214
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Capital employed is the sum of property, plant and equipment, operating
working capital and other assets less any unrealized balance sheet losses
included in other liabilities. Capital employed is a measure of the total
investment in a business in terms of property, plant, equipment, operating
working capital and other assets.

    -------------------------------------------------------------------------
    (US $ millions)             2008      2007      2006      2005      2004
    -------------------------------------------------------------------------
    Property, plant and
     equipment               $   879   $   968   $ 1,008   $   921   $   927
    Accounts receivable           12        83       130       145       150
    Tax receivable                13        89        33         -         -
    Inventory                     81       131        98        99        90
    Accounts payable and
     accrued liabilities        (146)     (191)     (228)     (225)     (238)
    Other assets                  36         5         7         4         5
    Unrealized net investment
     hedge losses(1)              (8)       (8)      (25)        -       (16)
    -------------------------------------------------------------------------
    Capital employed         $   867   $ 1,077   $ 1,023   $   944   $   918
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Included in other liabilities.
    

    ROCE (return on capital employed) is EBITDA divided by average capital
employed. ROCE is a measurement of financial performance, focusing on cash
generation and the efficient use of capital. As Norbord operates in a cyclical
commodity business, Norbord interprets ROCE over the cycle as a useful means
of comparing businesses in terms of efficiency of management and viability of
products. Norbord targets top-quartile ROCE among North American forest
products companies over the cycle.

    ROE (return on common equity) is earnings available to common
shareholders (earnings less preferred share dividends) divided by common
shareholders' equity. ROE is a measure for common shareholders to determine
how effectively their invested capital is being employed. As Norbord operates
in a cyclical commodity business, Norbord looks at ROE over the cycle and
targets top-quartile performance among North American forest products
companies.

    Total shareholder return is a useful measure of the return on an
investment in Norbord common shares including share price appreciation and
dividends. The calculation assumes the reinvestment of all dividends in shares
of Norbord. The 2004 return assumes the shares of Fraser Papers received in
the distribution were disposed on the first day of trading with the
reinvestment of the proceeds in Norbord shares.

    Net debt is the principal value of long-term debt including the current
portion and bank advances less drawings under the term debt facility and cash
and cash equivalents. Net debt is a useful indicator of a company's debt
position. Net debt comprises:

    
    -------------------------------------------------------------------------
    (US $ millions)             2008      2007      2006      2005      2004
    -------------------------------------------------------------------------
    Long-term debt           $   532   $   478   $   480   $   440   $   450
    Current portion
     of long-term debt             -       197         -         -         1
    Drawings under term
     debt facility               (35)        -         -         -         -
    Cash and cash equivalents    (20)     (128)      (20)     (155)     (215)
    -------------------------------------------------------------------------
    Net debt                 $   477   $   547   $   460   $   285   $   236
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Tangible net worth consists of shareholders' equity and drawings under
the term debt facility. A minimum tangible net worth of $300 million is one of
two financial covenants contained in the Company's committed revolving bank
lines and accounts receivable securitization program.

    Net debt to capitalization, book basis, is net debt divided by the sum of
net debt and tangible net worth. Net debt to capitalization, book basis, is a
measure of a company's relative debt position. Norbord interprets this measure
as an indicator of the relative strength and flexibility of its balance sheet.
In addition, a maximum net debt to capitalization, book basis, of 65% is one
of two financial covenants contained in the Company's committed revolving bank
lines.

    Net debt to capitalization, market basis, is net debt divided by the sum
of net debt and market capitalization. Market capitalization is the number of
common shares outstanding at period end multiplied by the trailing 12-month
average per share market price. Market basis capitalization is intended to
correct for the low historical book value of Norbord's asset base relative to
its fair value. Net debt to capitalization, market basis, is a key measure of
a company's relative debt position and Norbord interprets this measure as an
indicator of the relative strength and flexibility of its balance sheet. While
the Company considers both book and market basis metrics, the Company believes
the market basis to be superior to the book basis in measuring the true
strength and flexibility of its balance sheet.

    FORWARD-LOOKING STATEMENTS

    This document includes forward-looking statements, as defined by
applicable securities legislation. Often, but not always, forward-looking
statements can be identified by the use of words such as "believes,"
"expects," "does not expect," "is expected," "targets," "outlook," "plans,"
"scheduled," "estimates," "forecasts," "intends," "anticipates" or "does not
anticipate" or variations of such words and phrases or statements that certain
actions, events or results "may," "could," "would," "might" or "will" be
taken, occur or be achieved. Forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Norbord to be materially different
from any future results, performance or achievements expressed or implied by
the forward-looking statements.
    Examples of such statements include, but are not limited to, comments
with respect to: (1) outlook for the markets for products; (2) expectations
regarding future product pricing; (3) outlook for operations; (4) expectations
regarding mill capacity and production volumes; (5) objectives; (6) strategies
to achieve those objectives; (7) expected financial results; (8) sensitivity
to changes in product prices, such as the price of OSB; (9) sensitivity to key
input prices, such as the price of natural gas; (10) sensitivity to changes in
foreign exchange rates; (11) Margin Improvement Program targets; (12)
expectations regarding income tax rates; (13) expectations regarding
compliance with environmental regulations; (14) expectations regarding
contingent liabilities and guarantees, including the outcome of pending
litigation; and (15) expectations regarding the amount, timing and benefits of
capital investments.
    Although Norbord believes it has a reasonable basis for making these
forward-looking statements, readers are cautioned not to place undue reliance
on such forward-looking information. By its nature, forward-looking
information involves numerous assumptions, inherent risks and uncertainties,
both general and specific, which contribute to the possibility that the
predictions, forecasts and other forward-looking statements will not occur.
These factors include, but are not limited to: (1) assumptions in connection
with the economic and financial conditions in the United States, Europe,
Canada and globally; (2) risks inherent with product concentration; (3)
effects of competition and product pricing pressures; (4) outcome of the OSB
class action lawsuits; (5) risks inherent with customer dependence; (6)
effects of variations in the price and availability of manufacturing inputs
including continued access to fibre resources at competitive prices; (7)
various events which could disrupt operations, including natural events and
ongoing relations with employees; (8) impact of changes to or non-compliance
with environmental regulations; (9) impact of any product liability claims in
excess of insurance coverage; (10) risks inherent with a capital intensive
industry; (11) impact of future outcome of certain tax exposures; and (12)
effects of currency exposures and exchange rate fluctuations.
    The above list of important factors affecting forward-looking information
is not exhaustive. Additional factors are noted elsewhere and reference should
be made to the other risks discussed in filings with Canadian securities
regulatory authorities. Except as required by applicable law, Norbord does not
undertake to update any forward-looking statements, whether written or oral,
that may be made from time to time by or on behalf of the Company, whether as
a result of new information, future events or otherwise, or to publicly update
or revise the above list of factors affecting this information.


    
                                             Management's Responsibility for
                                                    the Financial Statements
    

    The accompanying consolidated financial statements and all information in
this annual report are the responsibility of management and have been approved
by the Board of Directors.
    The consolidated financial statements have been prepared by management in
accordance with Canadian generally accepted accounting principles. Financial
statements are not precise since they include certain amounts based upon
estimates and judgments. When alternative methods exist, management has chosen
those it deems to be the most appropriate in the circumstances in order to
ensure that the consolidated financial statements are presented fairly, in all
material respects, in accordance with Canadian generally accepted accounting
principles.
    The Company maintains systems of internal controls, which are designed to
provide reasonable assurance that accounting records are reliable and to
safeguard the Company's assets.
    The Board of Directors is responsible for ensuring that management
fulfills its responsibilities for financial reporting and is ultimately
responsible for reviewing and approving the financial statements. The Board
carries out this responsibility principally through its Audit Committee.
    The Audit Committee is appointed by the Board and reviews the
consolidated financial statements and management's discussion and analysis;
considers the report of the external auditors; assesses the adequacy of the
internal controls of the Company; approves the services provided by the
external auditors; examines the fees and expenses for audit services; and
recommends to the Board the independent auditors for appointment by the
shareholders. The Committee reports its findings to the Board of Directors for
consideration when approving the consolidated financial statements for
issuance to the shareholders.

    
    January 29, 2009

    (signed) J. Barrie Shineton                    (signed) Robin E. Lampard

    J. Barrie Shineton                                      Robin E. Lampard
    President and Chief Executive Officer          Senior Vice President and
                                                     Chief Financial Officer

                                                            Auditors' Report
    

    To the Shareholders of Norbord Inc.

    We have audited the consolidated balance sheets of Norbord Inc. as at
December 31, 2008 and 2007, and the consolidated statements of earnings and
shareholders' equity and comprehensive income and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
    We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
    In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at December
31, 2008 and 2007, and the results of its operations and its cash flows for
the years then ended in accordance with Canadian generally accepted accounting
principles.

    
    January 29, 2009                                       (signed) KPMG LLP
    Toronto, Canada                          Chartered Accountants, Licensed
                                                          Public Accountants




                                         Consolidated Statements of Earnings

    -------------------------------------------------------------------------
    Years ended December 31
    (US $ millions, except per share information)           2008        2007
    -------------------------------------------------------------------------

    Net sales                                          $     943   $   1,104
    -------------------------------------------------------------------------

    Earnings before interest, income tax, depreciation,
     litigation settlement and provision for
     non-core operation                                      (60)         42

    Litigation settlement (note 19)                          (32)          -
    Provision for non-core operation (note 11)                (4)          -
    Interest and other income                                  3           5
    Interest expense (notes 3 and 7)                         (49)        (49)
    -------------------------------------------------------------------------
    Earnings before income tax and depreciation             (142)         (2)

    Depreciation (note 2)                                    (70)        (88)
    Income tax recovery (note 12)                             96          45
    -------------------------------------------------------------------------

    Earnings                                           $    (116)  $     (45)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Earnings per common share (note 10)
      Basic                                            $   (0.77)  $   (0.31)
      Diluted                                          $   (0.77)  $   (0.31)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (See accompanying notes)



                                       Consolidated Statements of Cash Flows

    -------------------------------------------------------------------------
    Years ended December 31
    (US $ millions)                                         2008        2007
    -------------------------------------------------------------------------

    CASH PROVIDED BY (USED FOR):

    Operating Activities
    Earnings                                           $    (116)  $     (45)
    Items not affecting cash:
      Depreciation (note 2)                                   70          88
      Future income taxes (note 12)                          (81)        (46)
    Other items (note 13)                                    (22)         (5)
    -------------------------------------------------------------------------
                                                            (149)         (8)

    Net change in non-cash working capital balances
     (note 13)                                               136          23
    -------------------------------------------------------------------------

                                                             (13)         15
    -------------------------------------------------------------------------

    Investing Activities
    Investment in property, plant and equipment              (27)        (36)
    Other (note 13)                                           29         (32)
    -------------------------------------------------------------------------

                                                               2         (68)
    -------------------------------------------------------------------------

    Financing Activities
    Repurchase of 8 1/8% debentures (note 7)                (197)         (3)
    Issue of senior notes (note 7)                             -         198
    Drawings from term debt facility (note 7)                 35           -
    Revolving bank lines drawn (repaid) (note 7)              19          (2)
    Issue of common shares, net (note 9)                      65           -
    Issue of warrants, net (note 9)                           14           -
    Dividends paid                                           (33)        (32)
    -------------------------------------------------------------------------

                                                             (97)        161
    -------------------------------------------------------------------------

    Increase (decrease) in cash and cash equivalents   $    (108)  $     108
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Cash and cash equivalents, beginning of year       $     128   $      20
    Cash and cash equivalents, end of year (note 13)          20         128
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (See accompanying notes)



                                                 Consolidated Balance Sheets

    -------------------------------------------------------------------------
    As at December 31
    (US $ millions)                                         2008        2007
    -------------------------------------------------------------------------

    Assets
    Current assets:
      Cash and cash equivalents (note 13)              $      20   $     128
      Accounts receivable (note 3)                            12          83
      Tax receivable (note 12)                                13          89
      Inventory (note 4)                                      81         131
    -------------------------------------------------------------------------
                                                             126         431

    Property, plant and equipment (note 5)                   879         968
    Other assets (note 6)                                     36           5
    -------------------------------------------------------------------------

                                                       $   1,041   $   1,404
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Shareholders' Equity
    Current liabilities:
      Accounts payable and accrued liabilities         $     146   $     191
      Current portion of long-term debt (note 7)               -         199
    -------------------------------------------------------------------------
                                                             146         390

    Long-term debt (note 7)                                  542         480
    Other liabilities (note 8)                                14          18
    Future income taxes (note 12)                             73         156
    Shareholders' equity (note 9)                            266         360
    -------------------------------------------------------------------------

                                                       $   1,041   $   1,404
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Subsequent event (note 21)

    (See accompanying notes)

    On behalf of the Board:

    (signed) Robert J. Harding                   (signed) J. Barrie Shineton

    Robert J. Harding                                     J. Barrie Shineton
    Chair                              President and Chief Executive Officer



                  Consolidated Statements of Changes in Shareholders' Equity
                                                    and Comprehensive Income

    -------------------------------------------------------------------------
    Years ended December 31
    (US $ millions)                                         2008        2007
    -------------------------------------------------------------------------

    CONSOLIDATED STATEMENTS OF CHANGES IN
     SHAREHOLDERS' EQUITY

    Share Capital
    Balance, beginning of year                         $     150   $     127
    Dividend reinvestment plan (note 9)                       23          23
    Issue of common shares, net (note 9)                      65           -
    -------------------------------------------------------------------------
    Balance, end of year                               $     238   $     150
    -------------------------------------------------------------------------

    Contributed Surplus
    Balance, beginning of year                         $       1   $       -
    Stock-based compensation (note 9)                          2           1
    Issue of warrants, net (note 9)                           14           -
    -------------------------------------------------------------------------
    Balance, end of year                               $      17   $       1
    -------------------------------------------------------------------------

    Retained Earnings
    Balance, beginning of year                         $     205   $     305
    Adoption of new accounting standards (note 2)             (1)          -
    -------------------------------------------------------------------------
    Adjusted balance, beginning of year                      204         305
    Earnings                                                (116)        (45)
    Common share dividends                                   (56)        (55)
    Future income taxes - acquisition of control
     (notes 12 and 18)                                        (8)          -
    -------------------------------------------------------------------------
    Balance, end of year                               $      24   $     205
    -------------------------------------------------------------------------

    Accumulated Other Comprehensive Income (Loss)
    Balance, beginning of year                         $       4   $       2
    Other comprehensive income (loss)                        (17)          2
    -------------------------------------------------------------------------
    Balance, end of year                               $     (13)  $       4
    -------------------------------------------------------------------------

    Shareholders' equity                               $     266   $     360
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

    Earnings                                           $    (116)  $     (45)
    Other comprehensive income (loss):
      Net change in unrealized cumulative translation
       gain (loss)(net of $7 tax (2007 - nil))               (17)          2
    -------------------------------------------------------------------------

    Comprehensive income (loss)                        $    (133)  $     (43)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (See accompanying notes)



                              Notes to the Consolidated Financial Statements
                                           (in US $, unless otherwise noted)

    In these notes "Norbord" means Norbord Inc. and all of its consolidated
    subsidiaries and affiliates, and "Company" means Norbord Inc. as a
    separate corporation, unless the context implies otherwise. "Brookfield"
    means Brookfield Asset Management Inc. or any of its consolidated
    subsidiaries and affiliates, a related party, by virtue of a controlling
    equity interest in the Company.

    Note 1.  Accounting Policies

    Basis of Presentation

    The consolidated financial statements include the accounts of the Company
    and all of its subsidiaries.

    Use of Estimates

    The preparation of financial statements in conformity with Canadian
    generally accepted accounting principles (GAAP) requires management to
    make estimates and assumptions that affect the reported amounts of assets
    and liabilities and the disclosure of contingent assets and liabilities
    at the date of the financial statements and the reported amounts of
    revenues and expenses during the reporting period. Actual results could
    differ from those estimates. Significant estimates are required in
    assessing net recoverable amounts and net realizable values, tax and
    other provisions, hedge effectiveness and fair value.

    Cash and Cash Equivalents

    Cash and cash equivalents consist of demand deposits and investment grade
    money market securities and bank term deposits with maturities of 90 days
    or less from the date of purchase. Cash and cash equivalents are recorded
    at cost, which approximates market value.

    Inventories

    Inventories of raw materials and operating and maintenance supplies are
    valued at the lower of cost and net realizable value, with cost
    determined on an average cost basis.

    Inventories of finished goods are valued at the lower of cost and net
    realizable value, with cost determined on an average cost basis. Cost
    includes direct material, direct labour and an allocation of overhead.

    Property, Plant and Equipment

    Property, plant and equipment are recorded at cost and are depreciated on
    a straight-line basis. The rates of depreciation are intended to fully
    depreciate the assets over the following periods, which approximate their
    useful lives:

          Buildings                                        20 to 40 years
          Production equipment                             10 to 25 years

    Interest is capitalized on major capital projects during construction.
    Costs, net of revenues, incurred during the start-up period of major
    capital projects are deferred as other assets and amortized over the
    early productive life of the project.

    Employee Future Benefits

    Norbord sponsors various defined benefit and defined contribution pension
    plans, which cover substantially all employees and are funded in
    accordance with applicable plan and regulatory requirements. The benefits
    under Norbord's defined benefit pension plans are generally based on an
    employee's length of service and the final five years' average salary,
    and the plans do not provide for indexation of benefit payments. Norbord
    also provides non-pension post-retirement benefits consisting of health
    care benefits to eligible retirees of certain former businesses, which
    are funded on a pay-as-you-go basis.

    The measurement date for all defined benefit plans is December 31. The
    obligations associated with Norbord's defined benefit plans are
    actuarially valued using the projected unit credit method pro-rated on
    services, management's best estimate assumptions for expected investment
    performance, salary escalation and health care cost trend rates, and a
    current market discount rate. For the purpose of calculating the expected
    return on plan assets, those assets are measured at fair value. Prior
    service costs related to plan amendments and transitional assets are
    amortized on a straight-line basis over the estimated average remaining
    service lives (EARSL) of the employee groups. The net actuarial gains or
    losses in excess of 10% of the greater of the accrued benefit obligation
    and the fair value of plan assets are amortized on a straight-line basis
    over EARSL.

    Financial Instruments

    The Company utilizes derivative financial instruments solely to manage
    its foreign currency, interest rate, and commodity price exposures in the
    ordinary course of business. Derivatives are not used for trading or
    speculative purposes. All hedging relationships, risk management
    objectives, and hedging strategies are formally documented and
    periodically assessed to ensure that the changes in the value of these
    derivatives are highly effective in offsetting changes in the fair
    values, net investments or cash flows of the hedged exposures.
    Accordingly, all gains and losses (realized and unrealized, as
    applicable) on such derivatives are recognized in the same manner as
    gains and losses on the underlying exposure being hedged. Any resulting
    carrying amounts are included in other assets if there is an unrealized
    gain on the derivative or other liabilities if there is an unrealized
    loss on the derivative.

    The carrying value of financial instruments approximates fair value,
    except where disclosed in these notes. Fair values disclosed are
    determined using actual quoted market prices or, if not available,
    indicative prices based on similar publicly-traded instruments. The fair
    value of derivative financial instruments reflects the estimated amount
    that the Company would have paid or received if forced to settle all
    outstanding contracts at year-end. This fair value represents a point-in-
    time estimate that may not be relevant in predicting the Company's future
    earnings or cash flows.

    The Company is exposed to credit risk in the event of non-performance by
    its derivative counterparties. However, the Company's Board-approved
    financial policies require that derivative transactions be executed only
    with approved highly rated counterparties under master netting
    agreements; therefore, the Company does not anticipate any
    non-performance.

    Debt Issue Costs

    The Company accounts for transaction costs that are directly attributable
    to the issuance of long-term debt by deducting such costs from the
    carrying value of the long-term debt. The capitalized transaction costs
    are amortized to earnings over the term of the related long-term debt.

    Income Taxes

    The Company uses the liability method of accounting for income taxes.
    Accordingly, future tax assets and liabilities are recognized for the
    future tax consequences attributable to differences between the financial
    statement carrying amounts of existing assets and liabilities and their
    respective tax bases. Future tax assets and liabilities are measured
    using enacted or substantively enacted tax rates expected to apply to
    taxable income in the years in which those temporary differences are
    expected to be recovered or settled. In addition, the effect on future
    tax assets and liabilities of a change in tax rates is recognized in
    income in the year that includes the enactment or substantive enactment
    date.

    Stock Options

    The Company accounts for stock options using the fair value method. Under
    the fair value method, compensation expense for options is measured at
    the grant date using the Black-Scholes option pricing model and
    recognized in earnings on a straight-line basis over the vesting period.

    Warrants

    The Company accounts for warrants using the fair value method. Under the
    fair value method, the value of warrants is measured at the issue date
    using the Black-Scholes option pricing model, reduced by any related
    issue costs.

    Revenue Recognition

    Net sales are recognized when the risks and rewards of ownership pass to
    the purchaser. This is generally when goods are shipped. Sales are
    recorded net of third party transportation and discounts.

    Sales are governed by contract or by standard industry terms. Revenue is
    not recognized prior to the completion of those terms. The majority of
    product is shipped via third-party transport on a freight-on-board
    shipping point basis. In all cases, product is subject to quality testing
    by the Company to ensure it meets applicable standards prior to shipment.

    Translation of Foreign Currencies

    The accounts of subsidiaries having a functional currency other than the
    US dollar are translated using the current rate method. Gains or losses
    on translation are deferred and included in accumulated other
    comprehensive income. Gains or losses on foreign currency-denominated
    balances and transactions that are designated as hedges of net
    investments in these subsidiaries are reported in the same manner as
    translation adjustments.

    Monetary assets and liabilities denominated in currencies other than an
    entity's functional currency are translated at the rate of exchange
    prevailing at year-end. Gains or losses on translation of these items are
    included in the consolidated statement of earnings. Gains or losses on
    transactions that hedge these items are also included in the consolidated
    statement of earnings.

    Gains or losses on transactions that serve to hedge future foreign
    currency-denominated cash flows are recognized and reported in the same
    manner as the cash flows being hedged.

    Note 2.  Changes in Accounting Policies and Significant Accounting
             Estimates

    Capital Disclosures

    In December 2006, the Canadian Institute of Chartered Accountants (CICA)
    issued Section 1535, Capital Disclosures which requires the disclosure
    of: (i) an entity's objectives, policies and process for managing
    capital; (ii) quantitative data about an entity's managed capital; (iii)
    whether an entity has complied with capital requirements; and (iv) if an
    entity has not complied with such capital requirements, the consequences
    of such non-compliance. This new standard became effective for the
    Company on January 1, 2008, and the related disclosure is included as
    note 15 to the consolidated financial statements.

    Financial Instruments - Disclosure and Presentation

    In December 2006, the CICA issued two new accounting standards, Section
    3862, Financial Instruments - Disclosures and Section 3863, Financial
    Instruments - Presentation. These standards replace Section 3861,
    Financial Instruments - Disclosure and Presentation and enhance the
    disclosure of the nature and extent of risks arising from financial
    Instruments and how the entity manages those risks. These new standards
    became effective for the Company on January 1, 2008, and the related
    disclosure is included as Note 16 to the consolidated financial
    statements.

    Inventories

    In June 2007, the CICA issued Section 3031, Inventories, replacing
    Section 3030. This standard provides guidance on the determination of the
    cost of inventories and the subsequent recognition as an expense,
    including any write down to net realizable value. This new standard
    became effective for the Company on January 1, 2008 and the related
    disclosure is included in Note 4 to the consolidated financial
    statements.

    The impact of adopting this new standard was a $1 million reduction in
    opening retained earnings and a $3 million reclassification of certain
    capital spare parts from inventory to property, plant and equipment. The
    opening retained earnings adjustment of $1 million arises due to a lower
    opening carrying value of certain finished goods and raw material
    inventory and prior years' depreciation on the reclassified capital spare
    parts. Effective January 1, 2008, inventories of raw materials and
    operating maintenance supplies are valued at the lower of cost and net
    realizable value, with cost determined on an average cost basis. Prior to
    adopting the new standard on January 1, 2008, the Company valued these
    inventories at the lower of cost and replacement cost. Capital spare
    parts of $3 million were reclassified from inventory to property, plant
    and equipment at cost and are depreciated on a prospective basis using
    the straight-line method over two to five years, which approximates their
    useful lives.

    Significant Accounting Estimates

    Effective July 1, 2007, management's estimate of the useful life of its
    OSB assets was changed from 15 years to 25 years. In accordance with the
    Company's policy, depreciation rates for property, plant and equipment
    are assessed from time to time to ensure that they continue to
    approximate their useful life. This change in estimate was accounted for
    prospectively. The impact of the change in estimate on 2007 depreciation
    was a reduction of approximately $18 million. The impact on a full year
    of depreciation is a reduction of approximately $36 million.

    Future Changes in Accounting Policies - International Financial Reporting
    Standards (IFRS)

    The Accounting Standards Board (AcSB) confirmed in February 2008 that
    International Financial Reporting Standards (IFRS) will replace Canadian
    GAAP for publicly accountable enterprises for financial periods beginning
    on and after January 1, 2011.

    Note 3.  Accounts Receivable

    In November 2007, Norbord entered into a $50 million accounts receivable
    securitization program with a highly rated financial institution for an
    initial commitment period of 10 months with automatic extensions each
    four-month anniversary date thereafter unless terminated by either party
    prior to such anniversary date. In July 2008, the program limit was
    increased from $50 million to $85 million. At December 31, 2008, Norbord
    recorded cash proceeds of $68 million (2007 - $50 million) relating to
    this program.

    Under the program, Norbord has transferred substantially all of its
    present and future trade accounts receivable to the financial
    institution, on a fully serviced basis, for proceeds consisting of cash
    and deferred purchase price. Norbord can increase or decrease the cash
    component of proceeds on each settlement date, subject to the program
    limit. The utilization charge, which is based on money market rates plus
    a fixed margin, and other program fees are recorded as interest expense.
    In 2008, the utilization charge and program fee included in interest
    expense was $2 million (2007 - nil).

    The securitization program is subject to the following financial
    covenants with which the Company must comply on a quarterly basis:
    minimum tangible net worth of $300 million; and maximum net debt to total
    capitalization, book basis, of 65%. At year-end, the Company's tangible
    net worth was $301 million and net debt to total capitalization, book
    basis, was 61%. In addition, the program contains trade accounts
    receivable portfolio performance covenants and standard reporting
    requirements. The program is not subject to any credit-rating
    requirements.

    Note 4. Inventory

    -------------------------------------------------------------------------
    (US $ millions)                                        2008         2007
    -------------------------------------------------------------------------

    Raw materials                                      $     20     $     40
    Finished goods                                           32           59
    Operating and maintenance supplies                       29           32
    -------------------------------------------------------------------------

                                                       $     81     $    131
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The amount of inventory recognized as an expense during the year was
    $1,018 million which includes $69 million in depreciation expense on
    property, plant and equipment. As at December 31, 2008, the provision to
    reflect inventories at the lower of cost and net realizable value was $3
    million.


    Note 5. Property, Plant and Equipment

    -------------------------------------------------------------------------
    (US $ millions)          2008                           2007
    -------------------------------------------------------------------------
                           Accumu-                        Accumu-
                             lated                          lated
                            Depre-   Net Book              Depre-   Net Book
                   Cost    ciation      Value     Cost    ciation      Value
    -------------------------------------------------------------------------
    Land         $   12     $    -     $   12   $   12     $    -     $   12
    Buildings       232        105        127      256        110        146
    Production
     equipment    1,470        730        740    1,606        796        810
    -------------------------------------------------------------------------

                 $1,714     $  835     $  879   $1,874     $  906     $  968
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at December 31, 2008, production equipment includes construction in
    progress of $4 million (2007 - $3 million). In 2008, interest costs
    capitalized to property, plant and equipment was nil (2007 - $3 million).


    Note 6. Other Assets

    -------------------------------------------------------------------------
    (US $ millions)                                        2008         2007
    -------------------------------------------------------------------------

    Unrealized net investment hedge gains              $     26     $      -
    Unrealized interest rate swap gains                       6            -
    Other                                                     4            5
    -------------------------------------------------------------------------

                                                       $     36     $      5
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The unrealized net investment hedge gains and unrealized interest rate
    swap gains are offset by unrealized losses on the underlying exposures
    being hedged.


    Note 7. Long-Term Debt

    -------------------------------------------------------------------------
    (US $ millions)                                        2008         2007
    -------------------------------------------------------------------------

    Principal value
    7 1/4% debentures due 2012                         $    240     $    240
    Senior notes due 2017                                   200          200
    8 1/8% debentures repaid 2008                             -          197
    Term debt facility                                       35            -
    Revolving bank lines                                     57           38
    -------------------------------------------------------------------------
                                                            532          675
    Debt issue costs                                         (4)          (4)
    Deferred interest rate swap gains                         8           11
    Unrealized interest rate swap
     gains (losses) (notes 6 and 8)                           6           (3)
    -------------------------------------------------------------------------
                                                            542          679

    Less current portion of long-term debt                    -         (199)
    -------------------------------------------------------------------------

                                                       $    542     $    480
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Maturities of long-term debt are as follows:

    -------------------------------------------------------------------------
                          2009     2010     2011     2012  Thereafter  Total
    -------------------------------------------------------------------------
    Maturities of
     long-term debt      $   -    $  92    $   -    $ 240     $ 200    $ 532
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Senior Notes Due in 2017

    During 2007, the Company issued $200 million of senior notes due in 2017
    with an interest rate that varies with the Company's credit ratings. As
    at December 31, 2008, the interest rate was 7.95% (2007 - 6.70%) and
    during the year the average interest rate was 7.61% (2007 - 6.64%).

    8 1/8% Debentures Repaid in 2008

    In the first quarter of 2008, the 8 1/8% debentures with a principal
    value of $197 million were repurchased and a corresponding amount of
    interest rate swaps matured.

    Term Debt Facility

    In the first quarter of 2008, the Company concluded a $100 million term
    debt facility with Brookfield at an interest rate equal to the greater of
    8% and US base rate plus 1/2%. The facility matures in 2010 and is
    subordinated to the Company's committed revolving bank lines. Any
    drawings under the facility are treated as tangible net worth for bank
    line covenant purposes. At December 31, 2008, $35 million was drawn as
    cash.

    In the fourth quarter of 2008, the Company repaid $40 million of the
    unsecured term debt facility and the remaining $35 million was repaid
    subsequent to year end, in each case using proceeds from the Company's
    Offering (note 9).

    Revolving Bank Lines

    The Company has committed revolving bank lines of $235 million that
    mature in May 2010 and bear interest at money market rates plus a margin
    that varies with the Company's credit rating, and contain the following
    financial covenants with which the Company must comply on a quarterly
    basis: minimum tangible net worth of $300 million; and maximum net debt
    to total capitalization, book basis, of 65%. At year end, the Company's
    tangible net worth was $301 million and net debt to total capitalization,
    book basis, was 61%. At December 31, 2008, $57 million of the revolving
    bank lines was drawn as cash; $4 million was utilized for letters of
    credit; and $174 million was available to support short-term liquidity
    requirements.

    In the fourth quarter of 2008, the Company reached an agreement with its
    lenders to amend the terms on its revolving bank lines. The aggregate
    revolving bank line commitment will be reduced from $235 million to $205
    million, the term will be extended to May 2011 and the financial
    covenants will be amended to the following: minimum tangible net worth of
    $250 million and maximum net debt to total capitalization, book basis of
    70%. These amendments are subject to customary conditions including the
    execution of definitive documentation.

    Interest Rate Swaps

    At period end, the Company had $115 million (2007 - $362 million) in
    interest rate swaps outstanding. The terms of these swaps correspond to
    the terms of the underlying hedged debt.

    As at December 31, 2008, the effective interest rate on the Company's
    debt-related obligations including the impact of the interest rate swaps
    is 6.2% (2007 - 7.1%). Interest expense on long-term debt for the year,
    including the impact of interest rate swaps, was $45 million (2007 - $49
    million). Total interest paid during the year was $53 million (2007 - $53
    million).


    Note 8. Other Liabilities

    -------------------------------------------------------------------------
    (US $ millions)                                        2008         2007
    -------------------------------------------------------------------------

    Unrealized net investment hedge losses (note 16)   $      8     $      8
    Accrued pension and post-retirement
     benefits (note 14)                                       2            3
    Unrealized interest rate swap losses                      -            3
    Other liabilities                                         4            4
    -------------------------------------------------------------------------

                                                       $     14     $     18
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The unrealized net investment hedge losses and unrealized interest rate
    swap losses are offset by unrealized gains on the underlying exposures
    being hedged.


    Note 9. Shareholders' Equity

    -------------------------------------------------------------------------
    (US $ millions)                                        2008         2007
    -------------------------------------------------------------------------

    Capital stock:
      Share capital                                    $    238     $    150
      Contributed surplus                                    17            1
    -------------------------------------------------------------------------
                                                            255          151

    Retained earnings                                        24          205
    Accumulated other comprehensive income (loss)           (13)           4
    -------------------------------------------------------------------------

                                                       $    266     $    360
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Rights Offering

    On November 17, 2008, the Company filed a final short form prospectus
    with securities regulators in Canada pursuant to a Rights Offering (the
    "Offering") for gross proceeds of $199 million (CAD $240 million). Under
    the Offering, the Company distributed rights to existing eligible
    shareholders to purchase 272.6 million units at a price of CAD $0.88 per
    unit. Each unit consisted of one common share and one-half of a common
    share purchase warrant. One whole common share purchase warrant entitles
    the holder to purchase one common share at a price of CAD $1.36 at any
    time prior to December 24, 2013.

    On December 24, 2008, pursuant to the basic and additional subscription
    privileges, the Company issued 109.6 million common shares and 54.8
    million warrants to shareholders that exercised rights under the Offering
    and received gross proceeds of $79 million (CAD $96 million). Net
    proceeds received were used to repay drawings under the term debt
    facility and revolving bank lines (note 7).

    Under a Standby Purchase Agreement entered into in connection with the
    Offering, Brookfield agreed to purchase any units not otherwise
    subscribed for by other shareholders of the Company for a standby fee
    equal to 1% of gross proceeds from the Offering. Subsequent to year-end,
    Brookfield purchased 163 million common shares and 81.5 million warrants
    under the Standby Purchase Agreement for gross proceeds of $120 million
    (CAD $144 million) (notes 18 and 21). Share issue costs, including the
    standby fee, were approximately $3 million. Net proceeds received
    subsequent to year-end were used to repay drawings under the term debt
    facility and revolving bank lines.

    Share Capital

    As at December 31, 2008, the authorized capital stock of the Company is
    as follows: unlimited number of Class A and Class B preferred shares;
    unlimited number of non-voting participating shares; and an unlimited
    number of common shares. During 2008 and 2007, the number of issued and
    outstanding common shares changed as follows:

    -------------------------------------------------------------------------
                                    2008                       2007
    -------------------------------------------------------------------------
                           Shares          Amount     Shares          Amount
                         (million)  (US$ millions)  (million)  (US$ millions)
    -------------------------------------------------------------------------

    Balance, beginning
     of year                146.8   $         150      143.8   $         127
    Dividend
     reinvestment plan       12.2              23        2.8              23
    Issue of common
     shares, net            109.6              65          -               -
    Issue of common
     shares - stock
     options                  0.1               -        0.2               -
    -------------------------------------------------------------------------

    Balance, end of year    268.7   $         238      146.8   $         150
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Contributed Surplus

    Contributed surplus is comprised of transactions on account of warrants
    issued under the Offering and stock options issued under the Company's
    stock option plan.

    Warrants

    On December 24, 2008, 54.8 million warrants were issued pursuant to the
    basic and additional subscription privileges under the Offering.
    Subsequent to year-end, 81.5 million additional warrants were issued to
    Brookfield pursuant to the Standby Purchase Agreement entered into in
    connection with the Offering (note 21). Each warrant entitles the holder
    to purchase one common share at a price of CAD$1.36 at any time prior to
    December 24, 2013.

    The fair value of the warrants issued has been established using a Black-
    Scholes option pricing model using the following weighted average
    assumptions: dividend yield of nil; expected volatility 66%, risk-free
    interest rate 2.58%; and expected life of five years. The fair value of
    the warrants issued on December 24, 2008, was $14 million, net of issue
    costs.

    -------------------------------------------------------------------------
                                                                2008
    -------------------------------------------------------------------------
                                                                      Amount
                                                       Warrants         (US$
                                                       (million)    millions)
    -------------------------------------------------------------------------

    Balance, beginning of year                                -     $      -
    Issue of warrants                                      54.8           14
    -------------------------------------------------------------------------

    Balance, end of year                                   54.8     $     14
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Stock Options

    Under the Company's stock option plan, the Board of Directors of the
    Company may issue stock options to certain employees of the Company.
    These options vest over a five-year period and expire 10 years from the
    date of issue. In 2008, stock option expense of $2 million was recorded
    against contributed surplus (2007 - $1 million). During 2008 and 2007,
    the stock options changed as follows:

    -------------------------------------------------------------------------
                                       2008                      2007
    -------------------------------------------------------------------------
                                          Weighted                  Weighted
                                           Average                   Average
                             Options      Exercise     Options      Exercise
                           (millions)  Price (CAD$)  (millions)  Price (CAD$)
    -------------------------------------------------------------------------

    Balance, beginning
     of year                     2.4    $     7.73         1.8    $     6.31
    Options granted              1.0          6.09         0.8          9.16
    Options exercised           (0.1)         1.41        (0.2)         1.10
    -------------------------------------------------------------------------

    Balance, end of year         3.3    $     7.37         2.4    $     7.73
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Exercisable at year end      1.1    $     6.47         0.7    $     5.12
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The following table summarizes the weighted average exercise prices and
    the weighted average remaining contractual life of the balances of stock
    options outstanding at December 31, 2008:

    -------------------------------------------------------------------------
                          Options Outstanding              Options Vested
    -------------------------------------------------------------------------
                                Weighted   Weighted                Weighted
    Range of                     Average    Average                 Average
     Exercise                  Remaining   Exercise                Exercise
     Prices         Options  Contractual      Price     Options       Price
     (CAD$)       (millions)        Life      (CAD$)  (millions)      (CAD$)
    -------------------------------------------------------------------------

    $0.01               0.1         1.84   $   0.01         0.1    $   0.01
    $0.32 - $0.54       0.1         3.08       0.54         0.1        0.54
    $0.84 - $1.17       0.1         3.35       0.92         0.1        0.92
    $3.83               0.2         5.08       3.83         0.2        3.83
    $6.09               1.0         9.10       6.09           -           -
    $8.73 - $11.13      1.8         7.25       9.73         0.6        9.82
    -------------------------------------------------------------------------

                        3.3         7.25   $   7.37         1.1    $   6.47
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Note 10. Earnings per Common Share

    Earnings per common share are calculated as follows:

    -------------------------------------------------------------------------
    (US $ millions, except per share information,
     unless otherwise noted)                               2008         2007
    -------------------------------------------------------------------------

    Earnings available to common shareholders          $   (116)    $    (45)
    -------------------------------------------------------------------------

    Common shares (millions):
      Weighted average number of common shares
       outstanding                                        151.2        144.9
      Stock options                                         1.1          0.3
      Warrants                                             54.8            -
    -------------------------------------------------------------------------

    Diluted number of common shares                       207.1        145.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Earnings per common share:
      Basic                                            $  (0.77)    $  (0.31)
      Diluted                                          $  (0.77)    $  (0.31)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Stock options issued under the Company's stock option plan (note 9) and
    warrants issued under the Offering (note 9) were excluded from the
    calculation of diluted earnings per common share because the impact would
    be anti-dilutive. If dilutive in the future, they would be included to
    the extent that the exercise prices were less than the average market
    price of the Company's common shares during the year.

    Note 11. Provision for Non-Core Operation

    In the first quarter of 2008, the Company recorded a $4 million provision
    relating to severance arising from the permanent closure of a
    particleboard line at the Genk, Belgium site. The majority of the
    provision was paid by year-end.

    Note 12. Income Tax

    Future income taxes reflect the net tax effects of temporary differences
    between the carrying amounts of assets and liabilities in the financial
    statements and the amounts used for income tax purposes.

    Income tax recovery comprises the following:

    -------------------------------------------------------------------------
    (US $ millions)                                        2008         2007
    -------------------------------------------------------------------------

    Current income tax                                 $     15     $     91
    Future income tax                                        81          (46)
    -------------------------------------------------------------------------

    Income tax recovery                                $     96     $     45
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The differences between income taxes computed using statutory tax rates
    and income tax as recorded are as follows:

    -------------------------------------------------------------------------
    (US $ millions)                                        2008         2007
    -------------------------------------------------------------------------

    Earnings before income tax                         $   (212)    $    (90)
    -------------------------------------------------------------------------

    Income tax recovery at combined statutory rates         (66)         (28)
    Effect of:
      Rate differences on foreign activities                (19)         (32)
      Other                                                 (11)          15
    -------------------------------------------------------------------------

    Income tax recovery                                $    (96)    $    (45)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The income tax effects of temporary differences that give rise to future
    income taxes are as follows:

    -------------------------------------------------------------------------
    (US $ millions)                                        2008         2007
    -------------------------------------------------------------------------

    Benefit of tax loss carry forwards                 $    100     $     36
    Investment tax credits                                   20           24
    Other future income tax liabilities                     (12)         (24)
    Property, plant and equipment                          (181)        (192)
    -------------------------------------------------------------------------

    Future income taxes, net                           $    (73)    $   (156)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Comprised of:
      Current future income tax asset                  $      -     $      -
      Long-term future income tax liability                 (73)        (156)
    -------------------------------------------------------------------------

                                                       $    (73)    $   (156)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Income and income-related tax refunds (net) received during the year were
    $75 million (2007 - $33 million).

    Rights Offering

    Upon completion of their basic subscription privilege under the Offering
    on December 24, 2008, Brookfield's ownership interest in the Company
    increased to approximately 60%. For Canadian tax purposes, the increased
    ownership resulted in Brookfield acquiring control of the Company on
    December 24, 2008.

    As a result of the acquisition of control of the Company by Brookfield on
    December 24, 2008, $8 million in future tax benefits was charged to
    retained earnings in 2008 relating to capital loss carryforwards not
    available for future use. Current Canadian tax legislation prohibits
    capital losses from being used to shelter capital gains realized in
    fiscal periods subsequent to the acquisition of control date. Certain
    drafted Canadian legislation permits the Company to elect to apply the
    available capital losses against unrealized built-in gains on certain
    eligible assets as at the acquisition of control date. These tax
    attributes will be reinstated in the future when this pending income tax
    legislation is substantively enacted.

    Note 13. Supplemental Cash Flow Information

    Other items under operating activities comprise:

    -------------------------------------------------------------------------
    (US $ millions)                                        2008         2007
    -------------------------------------------------------------------------

    Cash provided by (used for):
      Amortization of deferred interest rate swap
       gains (note 7)                                  $     (3)    $     (8)
      Pension funding greater than pension expense
       (note 14)                                             (1)          (1)
      Income and income-related tax payments (note 12)      (10)           -
      Other                                                  (8)           4
    -------------------------------------------------------------------------

                                                       $    (22)    $     (5)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The net change in non-cash working capital balance comprises:

    -------------------------------------------------------------------------
    (US $ millions)                                        2008         2007
    -------------------------------------------------------------------------

    Cash provided by (used for):
      Accounts receivable                              $     36     $     51
      Tax receivable                                         85           33
      Inventory                                              37          (33)
      Accounts payable and accrued liabilities              (22)         (28)
    -------------------------------------------------------------------------

                                                       $    136     $     23
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Other under investing activities comprises:

    -------------------------------------------------------------------------
    (US $ millions)                                        2008         2007
    -------------------------------------------------------------------------

    Cash provided by (used for):
      Realized net investment hedge
       gains (losses) (note 16)                        $     26     $     (8)
      Recouponing payment, net (note 16)                      -          (21)
      Other                                                   3           (3)
    -------------------------------------------------------------------------

                                                       $     29     $    (32)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Cash and cash equivalents comprises:

    -------------------------------------------------------------------------
    (US $ millions)                                        2008         2007
    -------------------------------------------------------------------------

    Cash                                               $     17     $     17
    Cash equivalents                                          3          111
    -------------------------------------------------------------------------

                                                       $     20     $    128
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Note 14. Employee Benefit Plans

    Pension Plans

    Norbord has a number of pension plans in which participation is available
    to substantially all employees. Norbord's obligations under its defined
    benefit pension plans are determined periodically through the preparation
    of actuarial valuations, which are generally required every three years.
    The most recent actuarial valuation was conducted as of December 31,
    2006. The date of the next required valuation is December 31, 2009, and
    Norbord may choose to perform an actuarial valuation at an earlier date.

    Information about the Company's defined benefit pension plans is as
    follows:

    -------------------------------------------------------------------------
    (US $ millions)                                        2008         2007
    -------------------------------------------------------------------------
    Change in Accrued Benefit Obligation During the Year:
    Accrued benefit obligation, beginning of year        $   81       $   69
      Employee contributions                                  1            1
      Current service cost                                    2            2
      Interest on accrued benefit obligation                  4            4
      Benefits paid                                          (5)          (4)
      Net actuarial loss (gain)                             (13)          (2)
      Foreign currency exchange rate impact                 (15)          11
      Transfer                                               (1)           -
    -------------------------------------------------------------------------

    Accrued benefit obligation, end of year(1)           $   54       $   81
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Change in Plan Assets During the Year:
    Plan assets, beginning of year                       $   59       $   49
      Actual return on plan assets                           (7)           1
      Employer contributions                                  4            4
      Employee contributions                                  1            1
      Benefits paid                                          (5)          (4)
      Foreign currency exchange rate impact                 (11)           8
      Transfer                                               (1)           -
    -------------------------------------------------------------------------

    Plan assets, end of year(1)                          $   40       $   59
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Reconciliation of Funded Status:
    Accrued benefit obligation                           $   54       $   81
    Plan assets                                              40           59
    -------------------------------------------------------------------------

    Accrued benefit obligation in excess of plan assets     (14)         (22)
      Unamortized net actuarial loss                         18           26
      Unamortized prior service costs                         -            1
      Unamortized net transitional asset                     (4)          (6)
    -------------------------------------------------------------------------

    Net accrued benefit liability                             -           (1)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Recorded in:
      Other liabilities                                  $    -       $   (1)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) All plans have accrued benefit obligations in excess of plan assets.


    -------------------------------------------------------------------------
    (US $ millions)                                        2008         2007
    -------------------------------------------------------------------------
    Components of Net Periodic Pension Expense:
    Current service cost                                 $    2       $    2
    Interest on accrued benefit obligation                    4            4
    Actual return on plan assets                              7           (1)
    Net actuarial loss (gain)                               (13)          (1)
    Difference between actual and expected return on
     plan assets                                            (11)          (2)
    Difference between actual and recognized net
     actuarial gain (loss)                                   15            2
    Amortization of transition asset                         (1)          (1)
    -------------------------------------------------------------------------

    Net periodic pension expense                         $    3       $    3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Significant Weighted Average Actuarial Assumptions:
    Used in calculation of net periodic pension expense
     for the year:
      Discount rate                                        5.3%         5.0%
      Expected long-term rate of return on plan assets     7.8%         7.8%
      Rate of compensation increase                        3.7%         3.7%
    Used in calculation of accrued benefit obligation,
     end of year:
      Discount rate                                        6.4%         5.3%
      Rate of compensation increase                        3.6%         3.7%

    The weighted average asset allocation of Norbord's defined benefit
     pension plan assets is as follows:

    Asset category:
      Equity investments                                   54%           61%
      Fixed income investments                             46%           39%
    -------------------------------------------------------------------------
    Total assets                                          100%          100%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Operating costs include $5 million (2007 - $7 million) related to
    contributions to Norbord's defined contribution pension plans.

    Post-Retirement Benefit Plans

    Norbord funds health care benefits costs on a pay-as-you go basis.
    Norbord's obligations under its post-retirement benefit plan are
    determined periodically through actuarial valuations. At December 31,
    2008, the accrued benefit obligation related to this plan was $2 million
    (2007 - $4 million) and the net accrued liability was $2 million (2007 -
    $2 million). In 2008 and 2007 less than $1 million was included in
    operating costs related to this plan.

    Note 15. Capital Management

    Norbord's capital management objective is to achieve top-quartile return
    on equity (ROE) and cash return on capital employed (ROCE) over the
    business cycle among North American forest products companies to enable
    it to retain access to public and private capital markets, subject to
    financial market conditions. This objective is unchanged from the prior
    year.

    Norbord monitors its capital structure using two key measures of its
    relative debt position. While the Company considers both book and market
    basis metrics, the Company believes the market basis to be superior to
    the book basis in measuring the true strength and flexibility of its
    balance sheet.

    Net debt to capitalization, book basis, is net debt divided by the sum of
    net debt and tangible net worth. Net debt consists of the principal value
    of long-term debt including the current portion and bank advances less
    drawings under the term debt facility and cash and cash equivalents.
    Consistent with the treatment under the Company's bank line financial
    covenants, drawings under the term debt facility are excluded from net
    debt and treated as a component of tangible net worth. Tangible net worth
    consists of shareholders' equity and drawings under the term debt
    facility.

    Net debt to capitalization, market basis, is net debt divided by the sum
    of net debt and market capitalization. Net debt is calculated as outlined
    above under net debt to capitalization, book basis. Market capitalization
    is the number of common shares outstanding at period end multiplied by
    the trailing 12-month average per share market price. Market basis
    capitalization is intended to correct for the low historical book value
    of Norbord's asset base relative to its fair value.

    Norbord's capital structure at period end consisted of the following:

    -------------------------------------------------------------------------
                                                         Dec 31       Dec 31
    (US $ millions)                                        2008         2007
    -------------------------------------------------------------------------

    Long-term debt, principal value                    $    532     $    478
    Plus: Current portion of long-term debt                   -          197
    Less: Drawings under term debt facility(1)              (35)           -
    Less: Cash and cash equivalents                         (20)        (128)
    -------------------------------------------------------------------------
    Net debt                                                477          547
    -------------------------------------------------------------------------

    Shareholders' equity                                    266          360
    Plus: Drawings under term debt facility(1)               35            -
    -------------------------------------------------------------------------
    Tangible net worth                                      301          360
    -------------------------------------------------------------------------

    Total capitalization                               $    778     $    907
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net debt to capitalization, book basis                  61%          60%
    Net debt to capitalization, market basis                32%          30%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Drawings under the Company's term debt facility are treated as
        equity for bank line financial covenant purposes.

    The Company's $235 million of committed unsecured revolving bank lines
    contain the following financial covenants related to capital management
    that the Company must comply with on a quarterly basis: minimum tangible
    net worth of $300 million; and maximum net debt to total capitalization,
    book basis, of 65%. Drawings under the Company's term debt facility are
    treated as equity for bank line financial covenant purposes. At year-end,
    the Company's tangible net worth was $301 million and net debt to total
    capitalization, book basis was 61%.

    In the fourth quarter of 2008, the Company reached an agreement with its
    lenders to amend the terms on its revolving bank lines. The aggregate
    revolving bank line commitment will be reduced from $235 million to
    $205 million, the term will be extended to May 2011 and the financial
    covenants will be amended to the following: minimum tangible net worth of
    $250 million and maximum net debt to total capitalization, book basis, of
    70%. These amendments are subject to customary conditions including the
    execution of definitive documentation (note 7).

    Pursuant to the Offering (note 9), the Company raised $79 million (CAD
    $96 million) of shareholders' equity in the fourth quarter of 2008 and a
    further $120 million (CAD $144 million) subsequent to year-end. Related
    issue costs were approximately $3 million. The net proceeds were used to
    repay drawings under the term debt facility and revolving bank lines.

    Note 16. Financial Instruments

    Norbord has exposure to market, counterparty credit, and liquidity risk.
    Norbord's primary risk management objective is to protect the Company's
    balance sheet, earnings and cash flow in support of achieving top-
    quartile return on equity (ROE) and cash return on capital employed
    (ROCE) among North American forest products companies.

    Norbord's financial risk management activities are governed by Board-
    approved financial policies that cover risk identification, tolerance,
    measurement, hedging limits, hedging products, authorization levels, and
    reporting. Derivative contracts that are deemed to be highly effective in
    offsetting changes in the fair value, net investment or cash flows of
    hedged items are designated as hedges of specific exposures. Gains and
    losses on these instruments are recognized in the same manner as the item
    being hedged. Hedge ineffectiveness, if any, is measured and included in
    current period earnings.

    Market Risk
    -----------

    Norbord purchases commodity inputs, issues debt at fixed and floating
    interest rates, invests surplus cash, sells product and purchases inputs
    in foreign currencies, and invests in foreign operations. These
    activities expose the Company to market risk from changes in commodity
    prices, interest rates and foreign exchange rates, which affect the
    Company's balance sheet, earnings and cash flows. The Company uses
    derivatives as part of its overall financial risk management policy to
    manage certain exposures to market risk that result from these
    activities.

    Commodity Price Risk

    Norbord is exposed to commodity price risk on most of its manufacturing
    inputs, principally wood fibre, resin and energy. These manufacturing
    inputs are purchased primarily on the open market in competition with
    other users of such resources and prices are influenced by factors beyond
    Norbord's control.

    Norbord monitors market developments in all commodity prices to which it
    is materially exposed. No liquid futures markets exist for the majority
    of Norbord's commodity inputs but, where possible, Norbord will hedge a
    portion of its commodity price exposure up to Board-approved limits in
    order to reduce the potential negative impact of rising commodity input
    prices. Should Norbord decide to hedge any of this exposure, it will lock
    in prices directly with its suppliers and, if unfeasible, purchase
    financial hedges where liquid markets exist.

    At December 31, 2008, Norbord has hedged approximately 20% of its 2009
    expected natural gas consumption by locking in the price directly with
    its suppliers. Approximately 80% of Norbord's electricity is purchased in
    regulated markets and Norbord has hedged approximately 30% of its 2009
    deregulated electricity consumption. While these contracts are
    derivatives, they are exempt from being accounted for as financial
    instruments as they were normal purchases for the purpose of receipt.

    Interest Rate Risk

    Norbord's financing strategy is to access public and private capital
    markets to raise long-term core financing and utilize the banking market
    to provide committed standby credit facilities to support its short-term
    cash flow needs. The Company has fixed-rate debt, which subjects it to
    interest rate price risk, and has floating-rate debt, which subjects it
    to interest rate cash flow risk. In addition, the Company invests surplus
    cash in bank deposits and short-term money market securities.

    The Company enters into interest rate swaps to convert a portion of its
    debt from fixed to floating rates. At period end, $115 million of
    interest rate swaps were outstanding (note 7). The terms of these swaps
    correspond to the terms of the underlying hedged debt.

    From time to time the Company can recoupon its portfolio of interest rate
    swaps to more efficiently manage cash flow and credit exposure. Any gains
    or losses realized are deferred and amortized over the remaining term of
    the debt against which the swaps were designated as hedges. At period
    end, $8 million of gains were deferred and included in the carrying value
    of long-term debt in the consolidated balance sheet (note 7). In 2008,
    amortization of $3 million (2007 - 8 million) was included in interest
    expense (note 13).

    Currency Risk

    Norbord's foreign exchange exposure arises from the following sources:

    -   Net investments in self-sustaining foreign operations, limited to
        Norbord's investment in its European operations

    -   Net Canadian dollar-denominated monetary assets and liabilities

    -   Committed or anticipated foreign currency denominated transactions,
        primarily Canadian dollar costs in Norbord's Canadian operations and
        Euro revenues in Norbord's UK operations

    The Company's policy is to hedge all significant balance sheet foreign
    exchange exposures using cross-currency swaps and forward foreign
    exchange contracts. The Company may hedge a portion of future foreign
    currency denominated cash flows using forward foreign exchange contracts
    or options for periods up to three years in order to reduce the potential
    negative effect of a strengthening Canadian dollar versus the US dollar
    or a weakening Euro versus the Pound Sterling.

    Counterparty Credit Risk
    ------------------------
    Norbord invests surplus cash in bank deposits and short-term money market
    securities, sells its product to customers on standard market credit
    terms, and uses derivatives to manage its market risk exposures. These
    activities expose the Company to counterparty credit risk that would
    result if the counterparty failed to meet its obligations in accordance
    with the terms and conditions of its contracts with the Company.

    Norbord operates in a cyclical commodity business. Accounts receivable
    credit risk is mitigated through established credit management
    techniques, including conducting financial and other assessments to
    establish and monitor a customer's creditworthiness, setting customer
    limits, monitoring exposures against these limits, and in some instances,
    purchasing credit insurance or obtaining trade letters of credit. At
    period end, the key performance metrics on the Company's accounts
    receivable are in line with prior periods. As at December 31, 2008, the
    provision for doubtful accounts was less than $1 million (2007 - less
    than $1 million). In 2008, Norbord had one customer whose purchases
    represented greater than 10% of total net sales.

    Under an accounts receivable securitization program, Norbord has
    transferred substantially all of its present and future trade accounts
    receivable to a highly rated financial institution, on a fully serviced
    basis, for proceeds consisting of cash and deferred purchase price. At
    December 31, 2008, Norbord recorded cash proceeds of $68 million (2007 -
    $50 million) relating to this program. The fair value of the deferred
    purchase price approximates its carrying value as a result of the short
    accounts receivable collection cycle and negligible historical credit
    losses.

    Surplus cash is only invested with counterparties meeting minimum credit
    quality requirements and issuer and concentration limits. Derivative
    transactions are executed only with approved high-quality counterparties
    under master netting agreements. The Company monitors and manages its
    concentration of counterparty credit risk on an ongoing basis.

    The Company's maximum counterparty credit exposure at period end consists
    of the carrying amount of cash and cash equivalents and accounts
    receivable, which approximates fair value, and the fair value of
    derivative financial assets.

    Liquidity Risk
    --------------

    Norbord strives to maintain sufficient financial liquidity at all times
    in order to participate in investment opportunities as they arise, as
    well as to withstand sudden adverse changes in economic circumstances.
    Management forecasts cash flows for its current and subsequent fiscal
    years to identify financing requirements. These requirements are then
    addressed through a combination of committed credit facilities and access
    to capital markets.

    At period end, Norbord had $20 million of cash and cash equivalents,
    $174 million of unutilized committed revolving bank lines and $65 million
    unutilized under the term debt facility.

    Management believes that, subject to achieving its business plans, the
    Company has sufficient liquidity for the foreseeable future.

    Financial Liabilities
    ---------------------
    The following table summarizes the aggregate amount of contractual future
    cash outflows for the Company's financial liabilities:

    -------------------------------------------------------------------------
                                      Payments Due by Period

    (US $ millions)       2009     2010     2011     2012  Thereafter  Total
    -------------------------------------------------------------------------

    Principal            $   -    $  92    $   -    $ 240       $ 200  $ 532
    Interest                35       33       31       31          72    202
    -------------------------------------------------------------------------

    Long-term debt,
     including interest  $  35    $ 125    $  31    $ 271       $ 272  $ 734
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Non-Derivative Financial Instruments
    ------------------------------------
    The net book values and fair values of non-derivative financial
    instruments at year-end were as follows:

    -------------------------------------------------------------------------
                                       2008                      2007
    -------------------------------------------------------------------------
                             Net Book         Fair     Net Book         Fair
    (US $ millions)             Value        Value        Value        Value
    -------------------------------------------------------------------------

    Financial Assets:
    Cash and cash
     equivalents                $  20        $  20        $ 128        $ 128
    Accounts receivable            12           12           83           83
    Tax receivable                 13           13           89           89
    -------------------------------------------------------------------------

                                $  45        $  45        $ 300        $ 300
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Financial Liabilities:
    Accounts payable and
     accrued liabilities        $ 146        $ 146        $ 191        $ 191
    Long-term debt                542          376          679          633
    -------------------------------------------------------------------------

                                $ 688        $ 522        $ 870        $ 824
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Derivative Financial Instruments
    --------------------------------
    Information about derivative financial instruments at year-end was as
    follows:

    -------------------------------------------------------------------------
                                                2008
    -------------------------------------------------------------------------
                                      Unrealized
    (In millions and                  gain/(loss)      Realized
     in US $ unless         Notional   at period     gain/(loss)  Sensitivity
     otherwise noted)          Value       end(1)  year-to-date  to 1% change
    -------------------------------------------------------------------------

    Currency hedges:
      Net investment
        UK            (pnds stlg)103        26             14            2
        Belgium             (euro)79        (8)            12            1
      Monetary
       liabilities           CAD $18         -             (5)           -
      Future committed
       transaction
       (note 9)             CAD $144         1              -            1

    Interest rate hedges:
      Interest rate swaps       $115         6              -            1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                                2007
    -------------------------------------------------------------------------
                                      Unrealized
    (In millions and                  gain/(loss)      Realized
     in US $ unless         Notional   at period     gain/(loss)  Sensitivity
     otherwise noted)          Value       end(1)  year-to-date  to 1% change
    -------------------------------------------------------------------------

    Currency hedges:
      Net investment
        UK            (pnds stlg)128        (9)           (19)           3
        Belgium             (euro)84         1            (10)           1
      Monetary
       liabilities           CAD $66         2              4            1
      Future Committed
       Transaction           CAD $24         -              -            -

    Interest rate hedges:
      Interest rate swaps       $362        (3)             -            4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) The carrying values of the derivative financial instruments are
        equivalent to the unrealized gain/(loss) at period end.

    Realized and unrealized gains and losses on derivative financial
    instruments are offset by realized and unrealized losses and gains on
    the underlying exposures being hedged.

    Note 17. Commitments and Contingencies

    Tax Exposures

    In the normal course of operations, the Company is subject to various
    uncertainties concerning the interpretation and application of tax laws
    in the filing of its tax returns in operating jurisdictions that could
    materially affect the Company's cash flows. There can be no assurance
    that the tax authorities will not challenge the Company's filing
    positions.

    The Company is engaged in ongoing discussions with tax authorities
    regarding the Company's transfer pricing methodology. These tax
    authorities could challenge the validity of the Company's policies which
    generally involve areas of taxation open to various interpretations and
    a significant degree of judgment in applying the tax law to the Company's
    circumstances. If the tax authorities are successful in challenging the
    Company's transfer pricing methodology, it may have a material adverse
    effect on the Company's results of operations or cash flows. Norbord uses
    all available information in determining its transfer pricing methodology
    and in seeking to manage transfer pricing and other taxation issues to a
    satisfactory conclusion. Taking account of external professional advice,
    the Company continues to believe that its taxable income has been
    reported in accordance with tax law requirements and, has not recorded a
    provision related to this matter. The ultimate resolution of this matter
    is dependent upon continuing negotiations with the relevant tax
    authorities and potentially appeals under the tax law.

    Other

    The Company has provided certain commitments and indemnifications,
    including those related to former businesses. The maximum amounts from
    many of these items cannot be reasonably estimated at this time. However,
    in certain circumstances, the Company has recourse against other parties
    to mitigate the risk of loss.

    The Company has entered into various commitments as follows:

    -------------------------------------------------------------------------
                                          Payments Due by Period

    (US $ millions)          2009    2010    2011    2012  Subsequent  Total
    -------------------------------------------------------------------------

    Purchase obligations    $  33   $  28   $  19   $   2      $   -   $  82
    Operating leases            3       3       2       1          3      12
    -------------------------------------------------------------------------

                            $  36   $  31   $  21   $   3      $   3   $  94
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Note 18. Related Party Transactions

    In the normal course of operations, the Company enters into various
    transactions on market terms with related parties which have been
    measured at exchange value and recognized in the consolidated financial
    statements. The following transactions have occurred between the Company
    and Brookfield during the normal course of business.

    Rights Offering

    In connection with the Offering, the Company entered into a Standby
    Purchase Agreement with Brookfield, in which Brookfield agreed to
    exercise all of its rights and to purchase any units not otherwise
    subscribed for by other shareholders of the Company. In 2008, Brookfield
    paid $72 million (CAD $87 million) to purchase 99.1 million common shares
    and 49.6 million warrants through their basic subscription privilege
    which increased their ownership interest to approximately 60% of the
    Company's issued and outstanding common shares. On December 24, 2008, as
    a result of the acquisition of control of the Company by Brookfield
    (note 12), $8 million of future income tax assets were charged to
    retained earnings. These tax attributes may be reinstated in the future
    when pending Canadian income tax legislation is substantively enacted.
    Subsequent to year-end, Brookfield paid $120 million (CAD $144 million)
    to acquire 163.0 million common shares and 81.5 million warrants under
    the Standby Purchase Agreement, increasing their ownership interest to
    approximately 75%. Subsequent to year-end, a standby fee of $2 million
    was paid to Brookfield which was based on 1% of the gross proceeds of
    the Offering (note 21).

    Term Debt Facility

    In 2008, the Company concluded a $100 million term debt facility with
    Brookfield. Interest expense on the term debt facility was $4 million
    for the year (2007 - $ nil).

    Dividend Reinvestment Plan (DRIP)

    In 2008, Brookfield elected to receive all of their dividends totaling
    $21 million (2007 - $20 million) as common shares which were distributed
    under the Company's Dividend Reinvestment Program (DRIP). The DRIP
    permits Canadian shareholders to elect to receive their dividends as
    common shares.

    Indemnity Commitment

    As at December 31, 2008, total future costs related to a 1999 asset
    purchase agreement between the Company and Brookfield for which Norbord
    provided an indemnity are estimated at less than $1 million and are
    included in other liabilities in the consolidated balance sheet.

    Other

    In 2008 and 2007, the Company provided certain administrative services
    to Brookfield or its affiliates which were charged on a cost recovery
    basis. In addition, the Company periodically engages the services of
    Brookfield or its affiliates for various financial, real estate and other
    business advisory services. In 2008, the fees for these services were
    less than $1 million and were charged at market rates.

    Guarantee of Certain Obligations of Fraser Papers Inc.

    Norbord continues to guarantee certain obligations under operating lease
    commitments of Fraser Papers Inc. which was distributed to common
    shareholders in 2004. The maximum potential amount of future payments
    that Norbord could be required to make under these obligations is
    estimated to be $1 million. The leases expire in March 2009. No amounts
    have been recorded in the consolidated balance sheet with respect to
    these guarantees. As security for these ongoing financial commitments to
    Fraser Papers Inc., Norbord has the right, at any time, to require
    Fraser Papers Inc. to provide a fixed first charge security interest
    over certain of Fraser Papers Inc.'s manufacturing facilities. In 2008,
    the fee for providing these guarantees is less than $1 million (2007 -
    less than $1 million).

    Note 19. Litigation Settlement

    Norbord and eight other North American OSB producers were named as
    defendants in several lawsuits filed in the US District Court for the
    Eastern District of Pennsylvania. The lawsuits alleged that these nine
    North American OSB producers violated US and various state antitrust and
    other laws by allegedly agreeing to fix prices and reduce the supply of
    OSB from June 1, 2002 through to at least February 2006.

    The Court certified: a nationwide class of persons and entities that
    purchased OSB in the US directly from any of the defendant North
    American OSB producers between June 1, 2002 and February 24, 2006; a
    nationwide class of persons who, as end users, indirectly purchased in
    the US for their own use, and not for resale, new OSB manufactured and
    sold by one or more of the defendant North American OSB producers
    between June 1, 2002 and February 24, 2006 (other than persons who
    purchased OSB only as part of a house or other structure); and a
    multi-state class of residents of seventeen states who, as end users,
    indirectly purchased in the US for their own use, and not for resale,
    new OSB manufactured and sold by one or more of the defendant North
    American OSB producers between June 1, 2002 and February 24, 2006 (other
    than persons who purchased OSB only as part of a house or other
    structure). All three classes sought damages or injunctive or other
    relief under applicable laws.

    Although Norbord vigorously contested the plaintiffs' allegations and
    continues to deny that it violated US antitrust or any other laws,
    Norbord entered into settlement agreements with the certified classes of
    direct and indirect purchasers of OSB to limit the risks and costs
    associated with a prolonged trial. Under the terms of the settlement
    agreements, which have been approved by the Court, Norbord paid
    $30 million into an escrow account for the benefit of members of the
    direct purchaser class and $2 million into an escrow account for the
    benefit of members of the indirect purchaser classes.

    As allowed by Court order, a small number of class members chose to opt
    out of the direct purchaser class; no members of the indirect purchaser
    classes chose to opt out. Each entity that opted out of the direct
    purchaser class is entitled to pursue its own individual "opt-out"
    claims against Norbord and the other defendants. Norbord has entered
    into a settlement agreement with one such entity. Norbord has also
    entered into an agreement with the remaining entities that opted out of
    the direct purchaser class. The terms of these agreements are not
    material to the Company.

    Note 20. Geographic Segments

    The Company has a single reportable segment. The Company operates
    principally in North America and Europe. Net sales by geographic segment
    are determined based on the origin of shipment and therefore include
    export sales.

    -------------------------------------------------------------------------
                                                 2008
    -------------------------------------------------------------------------
                                North
    (US $ millions)           America       Europe  Unallocated        Total
    -------------------------------------------------------------------------

    Net sales                 $   538      $   405      $     -      $   943
    EBITDA(1)                     (51)           4          (13)         (60)
    Depreciation                   43           26            1           70
    Property, plant and
     equipment                    682          194            3          879
    Investment in property,
     plant and equipment           25            2            -           27
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                 2007
    -------------------------------------------------------------------------
                                North
    (US $ millions)           America       Europe  Unallocated        Total
    -------------------------------------------------------------------------

    Net sales                 $   593      $   511      $     -      $ 1,104
    EBITDA(1)                     (22)          81          (17)          42
    Depreciation                   53           34            1           88
    Property, plant and
     equipment                    696          268            4          968
    Investment in property,
     plant and equipment           24           12            -           36
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) EBITDA is earnings before interest, income tax, depreciation,
        litigation settlement and provision for non-core operation.


    Note 21. Subsequent Events

    Rights Offering

    On January 6, 2009, Brookfield completed the standby commitment under
    the Offering through which it purchased an additional 163 million common
    shares and 81.5 million warrants for gross proceeds of approximately
    $120 million (CAD $144 million). The standby fee of $2 million was paid
    to Brookfield subsequent to year-end. Upon satisfaction of the standby
    commitment, Brookfield holds a total of 325 million common shares or
    approximately 75% of the total number of the Company's common shares
    issued and outstanding and 131 million warrants. Prior to the completion
    of the standby commitment, and after Brookfield had subscribed for shares
    under the Offering pursuant to its basic subscription privilege,
    Brookfield's interest was approximately 60% (note 9).

    Joint Venture Agreement

    On December 1, 2008 the Company and Kruger Inc. announced an agreement
    in principle to form a 50/50 joint venture to combine their respective
    hardwood plywood businesses. As of December 31, 2008, a Memorandum of
    Understanding has been signed and the transaction is expected to close in
    the first quarter of 2009.
    





For further information:

For further information: Anita Veel, Director, Corporate & Regulatory
Affairs, (416) 643-8838, anita.veel@norbord.com


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